Lear Corporation 2023 Q2 10-Q Summary
Business context and reporting period
Lear Corporation designs and manufactures automotive seating and electrical distribution and connection systems, battery disconnect units, electronic products and related components for global automotive original equipment manufacturers. The company reports through two segments: Seating and E-Systems. The filing covers the 13-week quarter and six months ended July 1, 2023, compared with July 2, 2022. Results are unaudited.
Global light vehicle production increased 11% year over year in the first six months of 2023, including increases of 12% in North America, 16% in Europe and Africa, 10% in Asia and 10% in South America. Production remained below pre-pandemic and historical peak levels.
Key financial metrics
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $5,999.2 million | $5,071.0 million | $11,844.7 million | $10,279.4 million |
| Gross profit | $457.0 million | $339.9 million | $887.0 million | $661.4 million |
| Gross margin | 7.6% | 6.7% | 7.5% | 6.4% |
| Income before taxes and equity earnings | $212.5 million | $104.8 million | $411.9 million | $181.1 million |
| Net income attributable to Lear | $168.7 million | $68.5 million | $312.3 million | $117.9 million |
| Diluted EPS | $2.84 | $1.14 | $5.25 | $1.96 |
| Operating cash flow | Not separately provided | Not separately provided | $275.8 million | $232.1 million |
Q2 sales increased 18%, driven by $642 million from higher production volumes and $257 million from new business, partly offset by $35 million of unfavorable foreign exchange. Six-month sales increased 15%, with $1.2 billion from higher production volumes and $0.4 billion from new business, partly offset by approximately $0.2 billion of foreign exchange effects.
- Seating: Q2 sales of $4.47 billion, segment earnings of $292.9 million and a 6.6% margin, compared with $3.87 billion, $213.9 million and 5.5%, respectively. Six-month sales were $8.92 billion, with a 6.5% margin versus 5.3% in the prior year.
- E-Systems: Q2 sales of $1.53 billion, segment earnings of $52.9 million and a 3.5% margin, compared with $1.20 billion, $2.0 million and 0.2%, respectively. Six-month sales were $2.92 billion, with a 3.3% margin versus 0.7% in the prior year.
- Expenses and taxes: Q2 SG&A was $182.8 million, or 3.0% of sales, versus 3.4% in the prior year. Q2 interest expense was $26.2 million and other expense was $19.5 million. The Q2 effective tax rate was 19.5%; the six-month rate was 21.1%.
Liquidity, cash flow and capitalization
| Balance-sheet item | July 1, 2023 | December 31, 2022 |
|---|---|---|
| Cash and cash equivalents | $901.9 million | $1,114.9 million |
| Total assets | $14,798.5 million | $13,763.0 million |
| Short-term borrowings | $26.9 million | $9.9 million |
| Long-term debt | $2,741.4 million | $2,591.2 million |
| Equity | $5,091.3 million | $4,830.3 million |
- Cash, cash equivalents and restricted cash declined by $212.1 million during the first six months to $905.3 million.
- Operating cash flow was $275.8 million, compared with $232.1 million in the prior-year period. Working capital consumed $328.1 million, including a $774.9 million increase in accounts receivable and a $74.4 million increase in inventories, partly offset by a $409.6 million increase in accounts payable.
- Investing cash outflows were $449.9 million, including $280.1 million of capital expenditures and $174.5 million for the I.G. Bauerhin acquisition.
- Financing cash outflows were $47.9 million after $150 million of term-loan borrowings, $53.3 million of share repurchases, $92.1 million of dividends to Lear stockholders and $46.2 million of dividends to noncontrolling interests.
- Lear reported $2.0 billion of available borrowing capacity under its revolving credit agreement and stated that existing liquidity and operating cash flow should satisfy foreseeable needs.
- The company declared quarterly dividends of $0.77 per share. It repurchased 469,532 shares for $63.1 million in the first half and had $1.166 billion remaining under its authorization through December 31, 2024.
Material changes versus the prior comparable period
- Revenue rose 18% in Q2 and 15% in the first half, primarily from higher vehicle production and new business.
- Gross margin improved by 90 basis points in Q2 and 110 basis points in the first half, reflecting favorable operating performance, restructuring benefits and lower restructuring costs, partly offset by customer selling-price reductions and foreign exchange.
- Net income attributable to Lear increased 146% in Q2 and 165% in the first half; diluted EPS increased to $2.84 from $1.14 in Q2 and to $5.25 from $1.96 for the first half.
- Restructuring costs declined to $48.1 million in the first half from $71.7 million. The remaining restructuring reserve was $80.5 million at July 1, 2023.
- Lear completed the $174.5 million, net-of-cash, acquisition of I.G. Bauerhin on April 26, 2023. The acquisition added approximately $69.9 million of goodwill and $17.0 million of intangible assets and is included in Seating.
- Debt increased primarily because of the new $150 million term loan used partly to finance the IGB acquisition. The term loan matures May 1, 2026, and bears interest based on SOFR plus a contractual margin.
- Accumulated other comprehensive loss improved to $681.7 million from $805.1 million at year-end, primarily reflecting derivative and foreign-currency movements.
Guidance, outlook, commentary and risks
- Management cited expected 2023 global vehicle production growth of approximately 5% versus 2022 based on July 2023 S&P Global Mobility projections. The filing does not provide clear consolidated revenue or earnings guidance.
- Capital expenditures are estimated at approximately $700 million for 2023.
- Lear expects approximately $21 million of additional restructuring costs related to actions initiated by July 1, 2023, generally within the next twelve months, including approximately $20 million in Seating and $1 million in E-Systems.
- Management continues to emphasize cost management, capacity alignment, Industry 4.0 investments, electrification-related growth, operational efficiency and disciplined capital returns.
- Key risks include vehicle production volatility, customer price reductions, semiconductor and component shortages, inflation, interest rates, labor and energy constraints, commodity costs, supply-chain disruptions, customer and supplier financial condition, foreign exchange, geopolitical events, cybersecurity, product liability and recalls, environmental matters, tax changes and impairment risk.
- Recorded reserves at July 1, 2023 included $15.1 million for legal disputes, $29.4 million for product warranty and recall matters and $8.1 million for environmental matters. Management stated that outcomes remain uncertain.
- Foreign exchange losses were $16.3 million in Q2 and $21.1 million in the first half. The first-half results also included a $5.0 million affiliate impairment and net tax benefits of $17.1 million.
- Disclosure controls were effective as of July 1, 2023. IGB was excluded from the year-end 2023 internal-control assessment during the permitted post-acquisition integration period.
Important facts for investors to verify
- Whether vehicle production, customer launches and new-business awards support the filing’s sales growth assumptions.
- Whether improved segment margins persist after restructuring benefits, customer price reductions, commodity costs and foreign exchange effects.
- The conversion of higher earnings into cash, particularly the effect of accounts receivable, inventory and other working-capital requirements.
- Progress on IGB integration, acquisition synergies, purchase-price allocation and the resulting goodwill and intangible-asset risks.
- Future restructuring spending, manufacturing inefficiencies and the effect of plant closures or workforce reductions.
- Debt repayment capacity, variable-rate exposure under the SOFR-based term loan, covenant compliance and use of the revolving facility.
- The sustainability of dividends and share repurchases given capital expenditures, acquisition spending and liquidity needs.
- Potential changes in product warranty, recall, legal, environmental, tax, foreign-exchange and impairment reserves.