ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
HIGHLIGHTS
We had first quarter trade sales of $1,214 million for the three months ending March 31, 2023, a decrease of 8% versus the first quarter 2022.
EPS was $.39 for the three months ending March 31, 2023, compared to $.66 in the same period of 2022.
Earnings Before Interest and Taxes (EBIT) for the three months ending March 31, 2023 was $89 million. This is down $48 million compared to the same period in 2022.
Operating cash flow was $97 million in the first three months of 2023, an increase of $58 million versus the same period of 2022.
In February 2023, the Board of Directors declared a $.44 first quarter 2023 dividend, $.02 cents higher than last year’s first quarter dividend, making our annual indicated dividend yield one of the highest among the Dividend Kings and extending our record of consecutive annual increases to over 51 years.
Share repurchases in the first quarter of 2023 were .1 million shares at an average price of $34.04.
INTRODUCTION
What We Do
Leggett & Platt, Incorporated (the Company, we, or our) is a diversified manufacturer that conceives, designs, and produces a wide range of engineered components and products found in many homes, offices, and automobiles. We make components that are often hidden within, but integral to, our customers’ products.
We are the leading U.S.-based manufacturer of: a) bedding components; b) automotive seat support and lumbar systems; c) specialty bedding foams and private-label finished mattresses; d) components for home furniture and work furniture; e) flooring underlayment; f) adjustable beds; and g) bedding industry machinery.
Our Segments
Our operations are comprised of approximately 135 production facilities located in 18 countries around the world. Our reportable segments are the same as our operating segments, which also correspond with our management organizational structure. Our segments are described below.
Bedding Products: This segment supplies a variety of components and machinery used by bedding manufacturers in the production and assembly of their finished products, as well as produces private label finished mattresses for bedding brands and adjustable bed bases. This segment is also vertically integrated into the production and supply of specialty foam chemicals, steel rod, and drawn steel wire to our own operations and to external customers. Our trade customers for wire make mechanical springs and many other end products. This segment contributed 44% of our trade sales during the first three months of 2023.
Specialized Products: From this segment, we supply lumbar support systems, seat suspension systems, motors and actuators, and control cables used by automotive manufacturers. We also produce and distribute tubing and tube assemblies for the aerospace industry and engineered hydraulic cylinders used in the material-handling and construction industries. This segment contributed 26% of our trade sales in the first three months of 2023.
Furniture, Flooring & Textile Products: Operations in this segment supply a wide range of components for residential and work furniture manufacturers, as well as select lines of private label finished furniture. We also produce or distribute carpet cushion, hard surface flooring underlayment, and textile and geo components. This segment contributed 30% of our trade sales in the first three months of 2023.
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 = (Change in Stock Price + Dividends) / Beginning Stock Price. We target average annual TSR of 11-14% through an approach that employs four TSR sources: revenue growth, margin expansion, dividends, and share repurchases.
We monitor our TSR performance on a rolling three-year basis. We believe our disciplined growth strategy, portfolio management, and prudent use of capital will support achievement of our goal over time.
The table below shows the components of our TSR targets.
| | | | | | | | |
| | Current Targets |
Revenue Growth | | 6-9% |
Margin Increase | | 1% |
| | |
Dividend Yield | | 3% |
Stock Buyback | | 1% |
Total Shareholder Return | | 11-14% |
Senior executives participate in an incentive program with a three-year performance period based on two equal measures: (i) Company Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) and (ii) Company Return on Invested Capital (ROIC). The combined EBITDA and ROIC results are subject to a payout multiplier based on the Company's TSR compared to a performance group of approximately 300 peers.
Customers
We serve a broad suite of customers, with our largest customer representing less than 6% of our trade sales in 2022. Many are companies whose names are widely recognized. They include bedding brands and manufacturers, residential and office furniture producers, automotive OEM and Tier 1 manufacturers, and a variety of other companies.
Organic Sales
We calculate organic sales as trade sales excluding sales attributable to acquisitions and divestitures consummated within the last twelve months. Management uses the metric, and it is useful to investors, as supplemental information to analyze our underlying sales performance from period to period in our legacy businesses.
Major Factors That Impact Our Business
Many factors impact our business, but those that generally have the greatest impact are discussed below.
Market Demand
Market demand (including product mix) is impacted by several economic factors, with consumer confidence being the 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 products and components. Some of these factors also influence business spending on facilities and equipment, which impacts approximately 25% of our sales. As we moved through 2022 and the first quarter of 2023, the dynamic macroeconomic and geopolitical environment pressured our markets and affected our demand. We expect overall demand in 2023 to be slightly lower than levels experienced in 2022.
Trends in Cost of Goods Sold
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. We have also been impacted by fluctuations in transportation and energy costs (partially from the Russian invasion of Ukraine) as well as labor. Our ability to recover higher costs (through selling price increases) is crucial. When we experience significant increases in 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. Over the past few years, we have seen varying degrees of inflation and deflation in U.S. steel pricing. Steel costs inflated the first half of 2022 but deflated in the second half of 2022 as demand in the steel markets softened. While steel rod costs were relatively flat, steel scrap costs increased in the first quarter of 2023 due to stronger demand for steel used in automotive manufacturing and construction.
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). In 2022, steel rod price increases outpaced steel scrap price increases resulting in significantly expanded metal margins within the steel industry. Metal margins expanded in the first half of 2022 but began to modestly compress in the second half of 2022 and through the first quarter of 2023. These expanded metal margins were partially offset by increased energy and input costs in our Steel Rod business. While uncertain, we currently expect lower metal margins in our Steel Rod business through 2023, which, if realized, would negatively impact our earnings.
We have exposure to the cost of chemicals, including TDI, MDI, and polyol. The cost of these chemicals has fluctuated at times, but we have generally passed the changes through to our customers. In 2022, chemical pricing was relatively stable at historically high levels. Pricing began to soften in the latter part of 2022 and continued in the first quarter of 2023.
Shortages in the labor markets in several industries in which we operate created challenges in hiring and maintaining adequate workforce levels in the last few years, which led to increased labor costs. Although this began to moderate in late 2022, labor costs remain at higher levels.
In 2022, some facilities experienced disruptions in logistics necessary to import, export, or transfer raw materials or finished goods, which generally resulted in increased transportation costs. We typically pass through these increased costs to our customers. The issues began to moderate in late 2022 and returned to near pre-pandemic conditions in the first quarter of 2023.
Our other raw materials include woven and nonwoven fabrics. We have experienced changes in the cost of these materials 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.
Supply Chain Shortages and Disruptions
We have experienced supply chain disruptions related to labor availability and freight challenges, as well as higher costs associated with each of these issues. In 2022, we experienced delays in delivery of raw materials, parts, and finished goods because of shutdown or congested delivery ports and trucking constraints. This resulted in reduced volume and higher costs in many of our businesses. These issues began to moderate in late 2022 and returned to near pre-pandemic conditions in the first quarter of 2023.
Currently, there is a shortage of semiconductors in the automotive industry. As semiconductor demand elsewhere in the economy has increased over the past few years, automotive OEMs and other suppliers have not been able to secure an adequate supply and as a result have reduced production of some automobile models and/or eliminated certain features (some of which may be added later), which in turn has reduced our sale of products. Consumer demand remains strong, but the semiconductor shortage has caused new vehicle inventories to remain near historically low levels. Our Automotive Group uses the semiconductors in seat comfort products, and to a lesser extent in motors and actuators. Although our Automotive Group has been able to obtain an adequate supply of semiconductors, we are dependent on our suppliers to deliver these semiconductors in accordance with our production schedule. A shortage of the semiconductors, either to us, the automotive OEMs, or our suppliers, can disrupt our operations and our ability to deliver products to our customers. If we, our customers, or our suppliers cannot secure an adequate supply of semiconductors, this may negatively impact our sales, earnings, and financial condition.
The Russian invasion of Ukraine has caused disruptions in our supply chain and negatively impacted our results of operations. Although we do not have operations in Russia, Belarus, or Ukraine, and we have not had a material amount of sales into these countries, some of our businesses, in the past, have indirectly sourced, and may continue to indirectly source subject to pricing and legal constraints, a portion of our supply chain requirements of titanium and birch plywood originating from Russia. Our Aerospace Products Group uses titanium in the production of aerospace tubing. Several of our businesses use birch plywood in their products. Also, a significant portion of neon gas is produced in Ukraine. Our Automotive Group uses semiconductors, the production of which uses neon gas. Since the invasion began, the prices of these materials have significantly increased. Several countries have imposed economic sanctions against Russia as a result of its military action. The European Union and the United Kingdom have banned timber imports from Russia. It is possible sanctions could be expanded, or additional measures taken, which could restrict the import of titanium, and further restrict the import of birch plywood originating from Russia or greatly increase the cost of procurement via further increased duties or otherwise. Also, if the conflict in Ukraine expands geographically or in intensity, this may have a negative impact on our operations, including access to energy and other raw materials.
A significant portion of global production of oil is refined and exported from Russia. The European Union and certain countries, including the United States, the United Kingdom, Canada, and Australia, have either partially or fully banned the import of Russian oil. With decreased supply availability, fuel costs have increased and may continue to increase. This has impacted, and may continue to impact, both our businesses and consumers. Also, there has been a reduction of natural gas exports from Russia to Europe from sanction-related impacts and disruption in pipeline delivery, resulting in shortages and higher prices. Higher energy prices have contributed to broader inflationary trends, which have resulted, in some cases, in reduced discretionary consumer spending and a softening of demand for our products. If this continues, the demand for our products may continue to be negatively impacted, which would have a negative impact on our sales.
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 compete in market segments that value product differentiation. However, when we do compete on cost, we typically remain price competitive in most of our business units, even versus many foreign manufacturers, as a result of our efficient operations, automation, vertical integration in steel rod and wire, logistics and distribution efficiencies, and large-scale purchasing of raw materials and commodities. 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.
Antidumping orders on innerspring imports. Since 2009, there have been antidumping duty orders on innerspring imports from China, South Africa, and Vietnam, ranging from 116% to 234%. In September 2019, the Department of Commerce (DOC) and the International Trade Commission (ITC) concluded a second sunset review extending the orders for an additional five years, through October 2024, at which time the DOC and ITC will conduct a third sunset review to determine whether to extend the orders for an additional five years.
Antidumping and countervailing orders on steel wire rod imports. 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%. In June 2020, the ITC and DOC concluded a first sunset review, extending the orders on China through June 2025, and in July 2020, the ITC and DOC concluded a third sunset review, determining to extend the orders on Brazil, Indonesia, Mexico, Moldova, and Trinidad & Tobago through August 2025. The ITC and DOC are currently conducting sunset reviews regarding duties for Belarus, Italy, Korea, Russia, South Africa, Spain, Turkey, Ukraine, United Arab Emirates, and the United Kingdom to determine whether to extend those orders for an additional five years.
Antidumping and countervailing orders on mattress imports. Since 2019, there has been an antidumping duty order on mattress imports from China ranging from 57% to 1,732%. This order will remain in effect through December 2024, at which time the DOC and ITC will conduct a sunset review to determine whether to extend the order for an additional five years.
In March 2020, the Company, along with other domestic mattress producers and two labor unions representing workers at other mattress producers (collectively "Petitioners"), filed antidumping petitions with the DOC and the ITC alleging that manufacturers of mattresses in Cambodia, Indonesia, Malaysia, Serbia, Thailand, Turkey, and Vietnam were unfairly selling their products in the United States at less than fair value (dumping) and a countervailing duty petition alleging manufacturers of mattresses in China were benefiting from subsidies. In March 2021, the DOC made final determinations, assigning China a countervailing duty rate of 97.78% and antidumping duty rates on the other seven countries from 2.22% – 763.28%. In April 2021, the ITC made a unanimous affirmative final determination that domestic mattress producers were materially injured by reason of the unfairly priced or subsidized imported mattresses. Accordingly, the agencies instructed that final antidumping and countervailing duty orders will remain in effect for five years, through May 2026, at which time the DOC and ITC will conduct a sunset review to determine whether to extend the orders for an additional five years. Appeals were filed with the U.S. Court of International Trade (CIT) by respondents as to the DOC’s final determinations on antidumping duty rates for Cambodia, Indonesia, and Vietnam and the ITC’s unanimous, final determination of material injury to the domestic industry. Petitioners separately appealed the DOC's final determinations on antidumping duty rates for Cambodia, Indonesia and Thailand.
In November 2022, the CIT ruled partially in favor of the DOC and Petitioners on the calculations of rates for Vietnam, but also sent the case back to the DOC to explain the use of certain financial data in making its determination. The DOC filed its explanation in February 2023.
In February 2023, the CIT ruled partially in favor of Petitioners on the calculation of rates for Cambodia, but also sent the case back to the DOC to explain the use of certain financial data in making its determination. In March 2023, the CIT ruled partially in favor of Petitioners on the calculation of rates for Indonesia, but also sent the case back to the DOC to explain treatment of certain in-transit mattresses and selling expenses. These matters and the other appeals are ongoing with no timeline for decisions by the CIT. See Item 1 Legal Proceedings on page 36 for more information. Relief under the CARES Act
We deferred $19 million of our 2020 payment of employer's Social Security match as provided by the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Approximately half was paid in January 2022 and the other half was paid in January 2023, all in accordance with the holiday schedules for the December 31, 2021 and December 31, 2022 deferral dates. This deferral did not have a material impact on our short- or long-term financial condition, results of operations, liquidity, or capital resources and did not contain material restrictions on our operations, sources of funding, or otherwise.
RESULTS OF OPERATIONS
Discussion of Consolidated Results
Three Months:
Trade Sales were $1,214 million in the first three months of 2023, an 8% decrease versus the same period last year. Organic sales decreased 11%. Volume was down 7%, primarily from demand softness in residential end markets, partially offset by growth in our Automotive, Aerospace, and Hydraulic Cylinders businesses. Raw material-related selling price decreases reduced sales 3%, and currency impact decreased sales 1%. Acquisitions, net of divestitures, increased sales 3%.
EBIT decreased 35% to $89 million, primarily from lower volume and lower metal margin in our Steel Rod business.
EPS decreased to $.39 for the first three months of 2023, versus $.66 in the same period of 2022, primarily from lower EBIT as discussed above.
Net Interest Expense and Income Taxes
2023 net interest expense was $2 million higher than the three months ended March 31, 2022 due to higher commercial paper borrowings and higher rates on those borrowing in 2023 versus 2022. The increase in commercial paper borrowings was a result of the repayment of our $300 million 3.4% Senior Notes that matured in August 2022 and an August 2022 acquisition.
Our worldwide effective tax rate was 22% for the first quarter of 2023, compared to 23% for the same quarter last year. While the U.S. statutory federal income tax rate was 21% in both years, foreign withholding taxes, the impact of foreign earnings, Global Intangible Low-Taxed Income (GILTI), and other less significant items added 4% to our tax rate in 2023 and 2% in 2022. In 2023, our rate was favorably impacted by 3% from a deferred tax benefit recorded for future distributions of post-retirement executive stock compensation.
For the full year, we are anticipating an effective tax rate of approximately 24%, including the impact of discrete tax items that we expect to occur from quarter to quarter. We utilize prudent tax planning strategies for opportunities to optimize our tax rate, but other factors, such as our overall profitability, the mix and level of earnings among jurisdictions, the type of income earned, business acquisitions and dispositions, the impact of tax audits, and the effect of tax law changes can also influence our rate.
Discussion of Segment Results
Three Month Discussion
A description of the products included in each segment, along with segment financial data, appears in Note 4 to the Consolidated Condensed Financial Statements on page 8. A summary of segment results is shown in the following tables. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Trade Sales (Dollar amounts in millions) | Three Months Ended March 31, 2023 | | Three Months Ended March 31, 2022 | | Change in Sales | | % Change in Organic Sales 1 |
$ | | % | |
Bedding Products | $ | 528.5 | | | $ | 639.4 | | | $ | (110.9) | | | (17.3) | % | | (17.2) | % |
Specialized Products | 320.7 | | | 264.1 | | | 56.6 | | | 21.4 | | | 8.5 | |
Furniture, Flooring & Textile Products | 364.4 | | | 418.8 | | | (54.4) | | | (13.0) | | | (14.7) | |
| | | | | | | | | |
| | | | | | | | | |
Total | $ | 1,213.6 | | | $ | 1,322.3 | | | $ | (108.7) | | | (8.2) | % | | (11.3) | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2023 | | Three Months Ended March 31, 2022 | | Change in EBIT | | EBIT Margins |
EBIT (Dollar amounts in millions) | $ | | % | | Three Months Ended March 31, 2023 | | Three Months Ended March 31, 2022 |
Bedding Products | $ | 33.3 | | | $ | 76.2 | | | $ | (42.9) | | | (56.3) | % | | 6.3 | % | | 11.9 | % |
Specialized Products | 28.7 | | | 20.3 | | | 8.4 | | | 41.4 | | | 8.9 | | | 7.7 | |
Furniture, Flooring & Textile Products | 28.3 | | | 42.7 | | | (14.4) | | | (33.7) | | | 7.8 | | | 10.2 | |
Intersegment eliminations & other | (1.0) | | | (1.6) | | | .6 | | | | | | | |
Total | $ | 89.3 | | | $ | 137.6 | | | $ | (48.3) | | | (35.1) | % | | 7.4 | % | | 10.4 | % |
| | | | | | | | | | | |
Depreciation and Amortization (Dollar amounts in millions) | Three Months Ended March 31, 2023 | | Three Months Ended March 31, 2022 |
Bedding Products | $ | 25.6 | | | $ | 26.2 | |
Specialized Products | 10.7 | | | 10.8 | |
Furniture, Flooring & Textile Products | 5.8 | | | 5.9 | |
Unallocated 2 | 3.3 | | | 2.8 | |
Total | $ | 45.4 | | | $ | 45.7 | |
1This is a change in trade sales not attributable to acquisitions or divestitures in the last 12 months. Refer to the respective segment discussions below for a reconciliation of the change in total segment trade sales to organic sales.
2Unallocated consists primarily of depreciation and amortization on non-operating assets.
Bedding Products
Trade sales decreased $111 million, or 17%. Organic sales decreased 17%. Volume decreased 9% primarily due to demand softness in U.S. bedding markets and lower trade demand in our Steel Rod and Drawn Wire businesses. Raw material-related selling price decreases reduced sales 7%, and currency impact decreased sales 1%. A small divestiture in 2022 reduced trade sales by less than 1%.
EBIT decreased $43 million, primarily from lower metal margin, lower volume, and lower overhead recovery.
Specialized Products
Trade sales increased $57 million, or 21%. Organic sales increased 8%, driven by volume growth of 11% and raw material-related selling price increases of 2% partially offset by currency impact of 5%. The Hydraulic Cylinders acquisition completed in August 2022 added 13% to trade sales growth.
EBIT increased $8 million, primarily from higher volume. First quarter 2023 also benefited from a $4 million reduction to a contingent purchase price liability associated with a prior year acquisition, primarily offset by currency impact.
Furniture, Flooring & Textile Products
Trade sales decreased $54 million, or 13%. Organic sales decreased 15%, from volume declines of 15% across the segment. Raw material-related selling price increases of 1% were offset by currency impact of 1%. Textile acquisitions in 2022 added 2% to trade sales.
EBIT decreased $14 million, primarily from lower volume.
LIQUIDITY AND CAPITALIZATION
Liquidity
Sources of Cash
Cash on Hand
At March 31, 2023, we had cash and cash equivalents of $345 million primarily invested in interest-bearing bank accounts and in bank time deposits with original maturities of three months or less. Substantially all of these funds are held in the international accounts of our foreign operations.
If we were to immediately bring back all our foreign cash to the U.S. in the form of dividends, we would pay foreign withholding taxes of approximately $18 million. Although there are capital requirements in various jurisdictions, none of this cash was inaccessible for repatriation at March 31, 2023.
Cash from Operations
The primary source of funds for our short-term cash requirements is our cash generated from operating activities. 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 for the three months ended March 31, 2023 was $97 million, up $58 million from the same period last year, reflecting a smaller use of cash for working capital partially offset by lower earnings.
We closely monitor our working capital levels and ended the quarter with adjusted working capital at 15.8% of annualized trade sales. The table below explains this non-GAAP calculation. We eliminate cash, current debt maturities, and the current portion of operating lease liabilities from working capital to monitor our operating efficiency and performance related to trade receivables, inventories, and accounts payable. We believe this provides a more useful measurement to investors since cash and current maturities can fluctuate significantly from period to period. As discussed in Cash on Hand above, substantially all of these funds are held by international operations and may not be immediately available to reduce debt on a dollar-for-dollar basis. | | | | | | | | | | | |
(Dollar amounts in millions) | March 31, 2023 | | December 31, 2022 |
Current assets | $ | 2,014.8 | | | $ | 1,958.0 | |
Current liabilities | 968.6 | | | 968.1 | |
Working capital | 1,046.2 | | | 989.9 | |
Cash and cash equivalents | 344.5 | | | 316.5 | |
Current debt maturities and current portion of operating lease liabilities | 64.0 | | | 58.9 | |
Adjusted working capital | $ | 765.7 | | | $ | 732.3 | |
Annualized trade sales 1 | $ | 4,854.4 | | | $ | 4,783.2 | |
Working capital as a percent of annualized trade sales | 21.6 | % | | 20.7 | % |
Adjusted working capital as a percent of annualized trade sales | 15.8 | % | | 15.3 | % |
1 Annualized trade sales is the respective quarter's trade sales multiplied by 4 (first quarter 2023 and fourth quarter 2022 trade sales were $1,213.6 million and $1,195.8 million, respectively). We believe measuring our working capital against this sales metric is more useful, since efficient management of working capital includes adjusting those net asset levels to reflect current business volume.
Three Primary Components of our Working Capital | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Amount (in millions) | | | | Days |
| | | | | | | | | Three Months Ended | | Twelve Months Ended | | Three Months Ended |
| March 31, 2023 | | December 31, 2022 | | March 31, 2022 | | | | March 31, 2023 | | December 31, 2022 | | March 31, 2022 |
Trade Receivables | $ | 642.2 | | | $ | 609.0 | | | $ | 666.5 | | | DSO 1 | | 48 | | 44 | | 45 |
| | | | | | | | | | | | | |
Inventories | $ | 892.7 | | | $ | 907.5 | | | $ | 1,045.8 | | | DIO 2 | | 81 | | 83 | | 89 |
| | | | | | | | | | | | | |
Accounts Payable | $ | 552.2 | | | $ | 518.4 | | | $ | 622.0 | | | DPO 3 | | 50 | | 50 | | 53 |
1Days sales outstanding
a. Quarterly: end of period trade receivables ÷ (quarterly net trade sales ÷ number of days in the period)
b. Annually: ((beginning of year trade receivables + end of period trade receivables) ÷ 2) ÷ (net trade sales ÷ number of days in the period)
2Days inventory on hand
a. Quarterly: end of period inventory ÷ (quarterly cost of goods sold ÷ number of days in the period)
b. Annually: ((beginning of year inventory + end of period inventory) ÷ 2) ÷ (cost of goods sold ÷ number of days in the period)
3Days payables outstanding
a. Quarterly: end of period accounts payable ÷ (quarterly cost of goods sold ÷ number of days in the period)
b. Annually: ((beginning of year accounts payable + end of period accounts payable) ÷ 2) ÷ (cost of goods sold ÷ number of days in the period)
We continue to monitor all elements of working capital in order to optimize cash flow.
Trade Receivables - Our trade receivables and DSO increased at March 31, 2023 compared to December 31, 2022. Accounts receivable increases were primarily associated with sales growth in the Specialized segment, whose customers generally have longer terms, and due to seasonality in the Fabric Converting and Geo Components businesses. Trade receivables decreased and DSO increased compared to March 31, 2022 due to demand softness and timing of payments, partially offset by acquisitions. Our allowance for doubtful accounts decreased by $2 million during the first three months of 2023 related to ordinary customer credit risk reviews. We closely monitor accounts receivable and collections, including accounts for possible loss. We also monitor general macroeconomic conditions and other items that could impact the expected collectability of all customers, or pools of customers with similar risk. 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 upon the facts and circumstances for each individual customer, as well as pools of similar customers.
Inventories - Our inventories and DIO decreased at March 31, 2023 compared to both December 31, 2022 and March 31, 2022. During the second half of 2022, inventories decreased as we reduced to levels needed to support current demand, primarily in Bedding, while maintaining our ability to service customer requirements. These reductions were somewhat offset by acquisitions as compared to March 31, 2022. In 2023, chemical price deflation was partially offset by advanced chemical purchases in anticipation of future inflation.
We continuously monitor our slower-moving and potentially obsolete inventory through reports on inventory quantities compared to usage 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.
Accounts Payable - Our accounts payable increased while DPO remained flat at March 31, 2023 compared to December 31, 2022 primarily due to the timing of steel scrap purchases. Accounts payable and DPO decreased compared to March 31, 2022. The decreased accounts payable balances were primarily related to the inventory factors discussed above. Our payment terms did not change meaningfully since last year, and we have continued to focus on optimizing payment terms with our vendors. We continue to look for ways to establish and maintain favorable payment terms through our significant purchasing power and also utilize third-party services that offer flexibility to our vendors, which in turn helps us manage our DPO as discussed below.
Accounts Receivable and Accounts Payable Programs - We participate in trade receivables sales programs in combination with certain customers and third-party banking institutions. Under each of these programs, we sell our entire interest in the trade receivable for 100% of face value, less a discount. Because control of the sold receivable is transferred to the buyer at the time of sale, accounts receivable balances sold are removed from the Consolidated Condensed Balance Sheets and the related proceeds are reported as cash provided by operating activities in the Consolidated Condensed Statements of Cash Flows. We had approximately $50 million and $55 million of trade receivables that were sold and removed from our Consolidated Condensed Balance Sheets at March 31, 2023 and December 31, 2022, respectively. These sales reduced our quarterly DSO by roughly four days at March 31, 2023 and December 31, 2022, and the impact to year-to-date operating cash flow (used for) and provided by was approximately ($5) million and $5 million for the three months ended March 31, 2023 and March 31, 2022, respectively.
For accounts payable, we have historically looked for ways to optimize payment terms through utilizing third-party programs that allow our suppliers to be paid earlier at a discount. While these programs assist us in negotiating payment terms with our suppliers, we continue to make payments based on our customary terms. A vendor can elect to take payment from a third party earlier with a discount, and in that case, we pay the third party on the original due date of the invoice. Contracts with our suppliers are negotiated independently of supplier participation in the programs, and we cannot increase payment terms pursuant to the programs. As such, there is no direct impact on our DPO, accounts payable, operating cash flows, or liquidity. The accounts payable associated with the third-party programs, which remain on our Consolidated Condensed Balance Sheets, were approximately $105 million at March 31, 2023 and $80 million at December 31, 2022.
While we utilize the above items as tools in our cash flow management and offer them as options to facilitate customer and vendor operating cycles, if there were to be a cessation of these programs, we do not expect it would materially impact our operating cash flows or liquidity.
Commercial Paper Program
Another source of funds for our short-term cash requirements is our $1.2 billion commercial paper program. As of March 31, 2023, we had $317 million commercial paper outstanding. For more information on our commercial paper program, see Commercial Paper Program on page 29. Credit Facility
Our credit facility is a multi-currency facility providing us the ability, from time to time, to borrow, repay, and re-borrow up to $1.2 billion until the maturity date, at which time our ability to borrow under the facility will terminate. The credit facility matures in September 2026. Currently, there are no borrowings under the credit facility. For more information on our credit facility, see Credit Facility on page 30. Capital Markets
We also believe that we have the ability to raise debt in the capital markets which acts as a source of funding of long-term cash requirements. Currently, we have $2.1 billion of total debt outstanding with $9 million due within 12 months and the remaining maturing through 2051. For more information, please see Long-Term Debt (including Current Maturities) on page 30. Uses of Cash
Our long-term priorities for uses of cash are: fund organic growth including capital expenditures, pay dividends, fund strategic acquisitions, and repurchase stock with available cash.
Capital Expenditures
We are making investments to support expansion in businesses and product lines where sales are profitably growing, for efficiency improvement and maintenance, and for system enhancements. We expect capital expenditures of $100-$130 million in 2023 of which we have spent $38 million as of March 31, 2023. Our employee incentive plans emphasize cash flow, which includes changes in working capital and capital expenditures. This emphasis focuses our management on investing additional capital dollars where attractive return potential exists.
Dividends
Dividends are one of the primary means by which we return cash to shareholders. In February, we declared a quarterly dividend of $.44 per share, which represented a $.02 or 4.8% increase versus first quarter of 2022.
Although our dividend payout ratio has been higher at times, our long-term targeted dividend payout ratio is approximately 50% of adjusted EPS (which excludes special items such as significant tax law impacts, impairment charges, restructuring-related charges, divestiture gains, litigation accruals, and settlement proceeds). Continuing our long track record of increasing the dividend remains a high priority. 2022 marked our 51st consecutive annual dividend increase. We are proud of our dividend record and plan to extend it.
Acquisitions
Our long-term, 6-9% annual revenue growth objective envisions periodic acquisitions. We seek strategic acquisitions that complement our current products and capabilities.
We did not acquire any businesses in the first three months of 2023 or 2022. For the full year 2023 we currently expect acquisition activity to be minimal.
Stock Repurchases
Share repurchases is one of our priorities for uses of cash. During the first quarter of 2023, we repurchased .1 million shares of our stock (at an average price of $34.04) and issued .6 million shares through employee benefit plans.
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. The level of repurchases will vary depending on various considerations, including cash from operations, alternative uses of cash, and opportunities to repurchase shares at an attractive price. For the full year 2023 we currently expect share repurchases to be minimal.
Short-Term and Long-Term Cash Requirements
In addition to the expected uses of cash discussed above, we have various material short-term (12 months or less) and long-term (more than 12 months) cash requirements. There have been no material changes in the first quarter 2023 to our short-term or long-term cash requirements as previously reported in our cash requirements table on page 48 of our Form 10-K filed February 24, 2023.
Capitalization
Capitalization Table
This table presents key debt and capitalization statistics for the periods presented: | | | | | | | | | | | |
(Dollar amounts in millions) | March 31, 2023 | | December 31, 2022 |
| | | |
Total debt excluding commercial paper | $ | 1,800.8 | | | $ | 1,801.1 | |
Less: Short-term debt and current maturities of long-term debt | 8.9 | | | 9.4 | |
Scheduled maturities of long-term debt | 1,791.9 | | | 1,791.7 | |
Average interest rates 1 | 3.8 | % | | 3.8 | % |
Average maturities in years 1 | 11.2 | | | 11.5 | |
Commercial paper 2 | 317.0 | | | 282.5 | |
Average interest rate on period-end balance outstanding | 5.3 | % | | 4.8 | % |
Average interest rate during the period (2023-three months;2022-twelve months) | 4.8 | % | | 3.2 | % |
Total long-term debt | 2,108.9 | | | 2,074.2 | |
Deferred income taxes and other liabilities | 525.4 | | | 502.4 | |
Shareholders’ equity and noncontrolling interest | 1,667.1 | | | 1,641.4 | |
Total capitalization | $ | 4,301.4 | | | $ | 4,218.0 | |
Unused committed credit: | | | |
Long-term | $ | 883.0 | | | $ | 917.5 | |
Short-term | — | | | — | |
Total unused committed credit 2 | $ | 883.0 | | | $ | 917.5 | |
| | | |
Cash and cash equivalents | $ | 344.5 | | | $ | 316.5 | |
| | | | | |
1 | These rates include current maturities, but exclude commercial paper to reflect the averages of outstanding debt with scheduled maturities. |
2 | The unused committed credit amount is based on our revolving credit facility and commercial paper program which, at year end 2022 and at the end of the first quarter of 2023, had a total authorized program amount of $1.2 billion. However, our borrowing capacity is limited by covenants to our credit facility. Reference is made to the discussion under Commercial Paper Program below and Credit Facility on page 30 for more details about our borrowing capacity at March 31, 2023. |
| |
Commercial Paper Program
Amounts outstanding related to our commercial paper program were:
| | | | | | | | | | | |
(Amounts in millions) | March 31, 2023 | | December 31, 2022 |
Total authorized program | $ | 1,200.0 | | | $ | 1,200.0 | |
Commercial paper outstanding (classified as long-term debt) | 317.0 | | | 282.5 | |
Letters of credit issued under the credit agreement | — | | | — | |
Amount limited by restrictive covenants of credit facility 1 | 357.2 | | | 200.9 | |
Total program available | $ | 525.8 | | | $ | 716.6 | |
1 Our borrowing capacity is limited by covenants to our credit facility. Reference is made to the discussion under Credit Facility on page 30 for more details about our borrowing capacity at March 31, 2023. The average and maximum amounts of commercial paper outstanding during the first quarter of 2023 were $358 million and $387 million, respectively. At quarter end, we had no letters of credit outstanding under the credit facility, but we had issued $46 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. We view these borrowings 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 $1.2 billion revolving credit facility maturing in 2026 discussed below.
Credit Facility
Our multi-currency credit facility matures in September 2026. It provides us the ability, from time to time subject to certain restrictive covenants and customary conditions, to borrow, repay, and re-borrow up to $1.2 billion.
Our credit facility contains restrictive covenants which (a) require us to maintain as of the last day of each fiscal quarter (i) Consolidated Funded Indebtedness minus the lesser of: (A) Unrestricted Cash, or (B) $750 million to (ii) Consolidated EBITDA for the four consecutive trailing quarters, such ratio not being greater than 3.50 to 1.00, provided, however, subject to certain limitations, if we have made a Material Acquisition in any fiscal quarter, at our election, the maximum Leverage Ratio shall be 4.00 to 1.00 for the fiscal quarter during which such Material Acquisition is consummated and the next three consecutive fiscal quarters; (b) limit the amount of total secured obligations to 15% of our total consolidated assets, and (c) limit our ability to sell, lease, transfer, or dispose of all or substantially all of our assets and the assets of our subsidiaries, taken as a whole (other than accounts receivable sold in a Permitted Securitization transaction, products sold in the ordinary course of business, and our ability to sell, lease, transfer, or dispose of any of our assets or the assets of one of our subsidiaries to us or one of our subsidiaries, as applicable) at any given point in time. We were in compliance with all of our debt covenants at the end of first quarter 2023, and expect to maintain compliance with the debt covenant requirements. In December 2022, we amended our credit facility to change the benchmark interest rate references from the London interbank offered rate to the secured overnight financing rate.
Our credit facility serves as back-up for our commercial paper program. At March 31, 2023, we had $317 million commercial paper outstanding and had no borrowing under the credit facility. As our trailing 12-month Consolidated EBITDA, unrestricted cash, and debt levels change, our borrowing capacity increases or decreases. Based on our trailing 12-month Consolidated EBITDA, unrestricted cash, and debt levels at March 31, 2023, our borrowing capacity under the credit facility was $526 million. However, this may not be indicative of the actual borrowing capacity moving forward, which may be materially different depending on our Consolidated EBITDA, unrestricted cash, debt levels, and leverage ratio requirements at that time.
Long-Term Debt (including Current Maturities)
We have total debt of $2.1 billion. The maturities of the long-term debt range from 2024 through 2051. For more details on long-term debt, please refer to Footnote J to our Consolidated Financial Statements on page 91 in our Form 10-K filed February 24, 2023. Our next maturity of public debt is our $300 million, 3.8% Senior Notes due in November 2024.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. To do so, we must make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses, and disclosures. If we used different estimates or judgments our financial statements could change, and some of those changes could be significant. Our estimates are frequently based upon historical experience and are considered by management, at the time they are made, to be reasonable and appropriate. Estimates are adjusted for actual events, as they occur.
Critical accounting estimates are those that are: (a) subject to uncertainty and change and (b) of material impact to our financial statements. There were no newly identified critical accounting policies or estimates in the first three months of 2023, and there have been no material changes to our critical accounting policies and estimates as previously disclosed beginning on page 50 in our Form 10-K filed February 24, 2023.
CONTINGENCIES
Litigation
Litigation Contingencies
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. We deny liability in all currently threatened or pending litigation proceedings and believe we have valid bases to contest all claims made against us. At March 31, 2023, our litigation contingency accrual was immaterial (which does not include accrued expenses related to workers' compensation, vehicle-related personal injury, product and general liability claims, taxation issues and environmental matters). Based on current known facts, aggregate reasonably possible (but not probable, and therefore, not accrued) losses in excess of accruals for litigation contingencies are estimated to be $13 million. If our assumptions or analyses regarding any of our contingencies are incorrect, or if facts change or future litigation arises, we could realize losses in excess of the recorded accruals (and in excess of the $13 million referenced above), which could have a material negative impact on our financial condition, results of operations, and cash flows. Also, we could be subject to future litigation of various types (including but not limited to litigation related to employment, intellectual property, environmental, taxation, vehicle-related personal injury, antitrust, climate change, and others) that could negatively impact our financial condition, results of operations, and cash flows. For more information regarding our litigation contingencies, see Item 1 Legal Proceedings on page 36 and Note 13 Contingencies on page 17 of the Notes to Consolidated Condensed Financial Statements. Climate Change
Transition Risks
Change in Laws, Policies, and Regulations. Many scientists, legislators, and others attribute global warming to increased levels of greenhouse gas (GHG) emissions, including carbon dioxide, which has led to significant legislative and regulatory efforts to limit such emissions. At March 31, 2023, we had approximately 135 production facilities in 18 countries. We also maintain a fleet of over-the-road tractor trailers that emit GHG. Our manufacturing facilities are primarily located in North America, Europe, and Asia. There are certain transition risks (meaning risks related to the process of reducing the Company’s carbon footprint) that could materially affect our business, capital expenditures, results of operations, financial condition, competitive position, and reputation. One of these transition risks is the change in treaties, laws, policies, and regulations that could impose significant operational and compliance burdens. For example, our operations are subject to certain governmental actions like the European Union’s (EU) “European Green Deal” (which provides for a 55% reduction in net GHG emissions by 2030 (compared to 1990 levels), and no net emissions of GHG by 2050), and the “Paris Agreement” (which is an international treaty on climate change designed to lower GHG emissions). In addition, specifically with respect to our Automotive Group, the EU is moving forward with an effective ban on the sale of new gas-powered automobiles (with the exception of CO2-neutral automobiles) in the EU from 2035 (with interim requirements by 2030), aiming to accelerate the conversion to zero-GHG emission automobiles as part of a broad package to combat global warming. Also, President Biden signed executive orders setting the goal of having zero-emission vehicles account for half of all new U.S. passenger cars and light trucks sales by 2030 and committing the Federal government to procuring only zero-emission light vehicles by 2035. Finally, some states, including California and New York, are also implementing similar provisions. The Company’s automotive products can be sold to manufacturers of either gas-powered or electric-powered vehicles. However, if our customers (who may be subject to any of these or other similarly proposed or newly enacted laws and regulations) incur additional costs to comply with such laws and regulations, which in turn, impact their ability to operate at similar levels in certain jurisdictions, the demand for our products could be adversely affected. Also, overall, there continues to be a lack of consistent climate legislation in the jurisdictions in which we operate, which creates economic and regulatory uncertainty. If these laws or regulations (including the SEC’s proposed rule regarding climate-related disclosures) impose significant operational restrictions and compliance requirements on us, they could increase costs associated with our operations, including costs for raw materials and transportation. Non-compliance with climate change treaties, legislative and regulatory requirements could also negatively impact our reputation. To date, however, we have not experienced a material impact from climate change legislative and regulatory efforts.
Market Transition. We are engaged in the manufacture of various automotive components including mechanical and pneumatic lumbar support and massage systems for seating, seat suspension systems, motors and actuators, and cables. For several decades, automotive manufacturers have sought lightweight components designed to increase fuel efficiency in the automobiles they manufacture. Replacing traditional steel components with high-strength steel, magnesium, aluminum alloys, carbon fiber, and polymer composites can directly reduce the weight of a vehicle's body and chassis, and therefore reduce a
vehicle’s fuel consumption. This increased fuel efficiency also indirectly reduces GHG emissions. Because of our technological competitiveness, this long-standing market transition has not had, and is not expected to have, a material negative impact on our share of the markets in which we compete. However, if we are unable to continue to produce comparatively lightweight components, our share in these automotive markets could be negatively impacted.
Physical Climate Change Risks
Direct Physical Effects. The acute and chronic physical effects of climate change, such as severe weather-related events, natural disasters and/or significant changes in climate patterns could have an increasingly adverse impact on our business and customers. As mentioned above, at March 31, 2023, we had approximately 135 manufacturing facilities in 18 different countries, primarily located in North America, Europe, and Asia. We serve thousands of customers worldwide. In 2022, our largest customer represented less than 6% of our sales, and our customers were located in approximately 100 countries. Although our diverse geographical manufacturing footprint and our broad geographical customer base mitigates the potential physical risks of any local or regional climate change weather-related event having a material effect on our operations and results, the increased frequency and severity of such weather-related events could pose a risk to our operations and results.
To continue improving our climate-related risk assessment processes, we use technology-based tools to evaluate our property portfolio’s exposure to certain natural catastrophic events. We also initiated integration of climate-related risk into our Enterprise Risk Management (ERM) process providing an opportunity to improve our internal processes for identifying, assessing, and managing climate-related risks. On April 1, 2023, we experienced damage to one of our Home Furniture and Bedding facilities in Mississippi due to tornadic activity. This event did not have a material impact on our physical properties as a whole, or our overall ability to manufacture and distribute our products to customers in a timely fashion, and it did not have a material effect on our business, financial condition, or results of operations. However, in the future, depending on whether severe weather-related events increase in frequency and severity, such events could result in potential damage to our physical assets, local infrastructure, transportation systems, water delivery systems, our customers’ or suppliers’ operations, as well as prolonged disruptions in our manufacturing operations (including but not limited to our steel rod mill), all of which could harm our business, results of operations, and financial condition.
Indirect Physical Effects. The physical effects of climate change could continue to have an adverse impact on our supply chain. In 2020 and 2021, we experienced (due, in part, to severe weather-related impacts) supply shortages in chemicals which restricted foam supply. The restriction of foam supply constrained overall mattress production in the bedding industry and reduced our production levels. The cost of chemicals and foam also increased due to the shortages. Severe weather impacts could also reduce supply of other products in our supply chain that could result in higher prices for our products and the resources needed to produce them. If we are unable to secure an adequate and timely supply of raw materials or products in our supply chain, or the cost of these raw materials or products materially increases, it could have a negative impact on our business, results of operations, and financial condition.
In addition, although the cost has not been, and is not expected to be, material to our business, results of operations, and financial condition, severe weather-related incidents may continue to result in increased costs of our property insurance.
Compliance Costs Related to GHG Emissions Inventory
To date, we have not experienced material climate-related compliance costs. However, evaluating opportunities to reduce our carbon footprint, setting goals for carbon reduction, and measuring performance in achieving those goals will be part of our environmental, sustainability, and governance strategy moving forward. We have completed our first GHG emissions inventory covering 2019 through 2021 and are in the process of completing the 2022 inventory. To ensure our information is complete and accurate, we are engaging in a third party limited assurance process for all four years. Our emissions inventory will include Scope 1 and Scope 2 carbon dioxide equivalent emissions. We believe our inventory in each of the four years was, or will be, prepared consistent with the GHG Protocol Corporate Accounting and Reporting Standard.
Our baseline measurement will inform a long-term GHG reduction strategy, including setting reduction targets and other key performance areas. We expect to publish our ESG objectives, goals, and targets, including climate-related goals in 2023 or in the first half of 2024. As we continue to expand our understanding of our company’s emission sources, geographic distribution of emissions, and available carbon reduction and mitigation opportunities, we will work to develop a roadmap to reduce our carbon footprint. We currently do not have an estimate of the capital expenditures or operating costs that may be required to implement our GHG reduction strategies. However, we do not expect that such capital expenditures or operating costs will be material to our financial condition or results of operations.
Cybersecurity Risks
We rely on information systems to obtain, process, analyze, and manage data, as well as to facilitate the manufacture and distribution of inventory to and from our facilities. We receive, process, and ship orders, manage the billing of and collections
from our customers, and manage the accounting for and payment to our vendors. We also manage our production processes with certain industrial control systems. We have a formal process in place for both incident response and cybersecurity continuous improvement that includes a cross-functional Cybersecurity Oversight Committee. Members of the Cybersecurity Oversight Committee update the Board quarterly on cybersecurity activity, with procedures in place for interim reporting if necessary. Our cybersecurity program, led by our Chief Information Security Officer, is based on industry recognized frameworks and takes a multifaceted approach to protecting our network, systems, and data, including personal information. We deploy a wide range of protective security technologies and tools including but not limited to encryption, firewalls, endpoint detection and response, security information and event management, multi-factor authentication, and threat intelligence feeds. In addition, we use an information security risk management approach that includes monitoring security threats and trends in the industry, analyzing potential security risks that could impact the business, partnering with industry recognized security organizations, and coordinating an appropriate response should the need arise.
Although we have not experienced any material cybersecurity incidents, we have enhanced our cybersecurity protection efforts over the last few years. We use a third party to periodically benchmark our information security program against the National Institute of Standards and Technology’s Cybersecurity Framework. We provide quarterly cybersecurity training for employees with access to our email and data systems, and we have purchased broad form cyber insurance coverage. Although we believe that our cybersecurity protection systems are adequate, cybersecurity risk has increased due to remote access, remote work conditions, and associated strain on employees. As such, technology failures or cybersecurity breaches could still create system disruptions or unauthorized disclosure or alterations of confidential information. We cannot be certain that the attacker’s capabilities will not compromise our technology protecting information systems, including those resulting from ransomware attached to our industrial control systems. If these systems are interrupted or damaged by any incident or fail for any extended period of time, then our results of operations could be adversely affected. We may incur remediation costs, increased cybersecurity protection costs, lost revenues resulting from unauthorized use of proprietary information, litigation and legal costs, increased insurance premiums, reputational damage, damage to our competitiveness, and negative impact on our stock price and long-term shareholder value.
Finally, burdens associated with regulatory compliance, including any potential regulations adopted by the Securities and Exchange Commission (SEC) regarding cybersecurity disclosure, may increase the Company’s costs.
Goodwill Impairment Testing
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 March 31, 2023, goodwill and other intangible assets represented $2.1 billion, or 40% of our total assets. In addition, net property, plant and equipment, operating lease right-of-use assets, and sundry assets totaled $1.1 billion, or 21% of total assets.
Our annual goodwill impairment testing performed in the second quarter of 2022 indicated no goodwill impairments. However, fair value exceeded carrying value by less than 100% for four reporting units as summarized in the table below:
| | | | | | | | | | | | | |
| | | Fair value in excess of carrying value | | Goodwill |
| | | Goodwill impairment testing as performed in the second quarter 2022 | | As of March 31, 2023 |
Bedding | | | 54 | % | | $902 | million |
Work Furniture | | | 78 | % | | $99 | million |
Aerospace Products | | | 40 | % | | $67 | million |
Hydraulic Cylinders | | | 32 | % | | $37 | million |
The Bedding reporting unit’s market value decreased compared to the 2021 testing primarily because of lower comparable company multiples and higher discount rates. Although the long-term outlook for the Bedding reporting unit remains strong, macroeconomic factors also have negatively impacted consumer confidence and spending in the near term, which in turn has had an adverse impact on the bedding market's near-term forecast. Our Specialty Foam business has experienced difficulties as a result of low demand and material inefficiencies. About two-thirds of the earnings challenge is a result of low demand driven by the general bedding market decline, the outsized impact on digitally native brands from changes in consumer privacy laws and cash constraints, and share loss from a small number of customers, with some of those sales shifting from finished goods to components. The remaining challenges relate primarily to material inefficiency from practices that emerged during the pandemic as we prioritized servicing customers amid chemical shortages and surging demand. While it may take some time to see significant improvements in Specialty Foam, especially with a continuing weak demand environment, we are confident in our recovery plan and are making progress. Our team has a pipeline of opportunities supported by our specialty foam
technologies. We are also focused on driving improvement in material margins through both process and equipment changes. We remain confident that our Specialty Foam business will drive long-term, profitable growth for the Segment and are placing our highest level of attention on improvements in sales and material management.
Although the Work Furniture and Aerospace Products reporting units' forecasts used in the 2022 goodwill impairment testing improved as compared to the 2021 testing, their fair values were adversely impacted by lower comparable company multiples and higher discount rates. Work Furniture's long-term forecasts increased from improving demand in the contract market as companies redesign their office footprints, although demand for products sold for residential has remained soft. Aerospace’s long-term forecasts improved in 2022, as fabricated duct assemblies are at 2019 levels, and demand for welded and seamless tube products is improving modestly but still below pre-pandemic levels. We expect the aerospace industry to return to historical levels in the next few years.
The Hydraulic Cylinders reporting unit had no goodwill associated with it at the time of our annual goodwill impairment testing in both 2022 and 2021, but an August 2022 acquisition added goodwill.
We are continuing to monitor all factors impacting these reporting units. If actual results or the long-term outlook of any of our reporting units materially differ from the assumptions and estimates used in the goodwill valuation calculations, we could incur impairment charges. These non-cash charges could have a material negative impact on our earnings. We did not identify any triggering events subsequent to the annual goodwill impairment testing date indicating a potential impairment.
NEW ACCOUNTING STANDARDS
The FASB has issued accounting guidance effective for the current and future periods. See Note 2 Accounting Standards Updates to the Consolidated Condensed Financial Statements on page 7 for a more complete discussion.