Lear Corporation 2021 Q3 Form 10-Q Summary
Business context and reporting period
Lear designs and manufactures automotive seating and electrical distribution, electronic systems, and software for global automotive original equipment manufacturers. The company reports two segments: Seating and E-Systems. This unaudited quarterly report covers the 13-week quarter and nine months ended October 2, 2021, compared with October 3, 2020.
Key financial metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Net sales | $4,268.2 million | $4,900.1 million | $14,383.3 million | $11,802.3 million |
| Gross profit / margin | $226.7 million / 5.3% | $442.8 million / 9.0% | $1,120.9 million / 7.8% | $649.6 million / 5.5% |
| Income before taxes and equity income | $13.9 million | $235.2 million | $522.0 million | $25.4 million |
| Net income attributable to Lear | $(26.5) million | $174.4 million | $352.4 million | $(43.1) million |
| Diluted EPS | $(0.44) | $2.89 | $5.83 | $(0.72) |
| Operating cash flow | Not separately provided | Not separately provided | $503.2 million | $262.3 million |
| Capital expenditures | Not separately provided | Not separately provided | $405.5 million | $285.3 million |
At October 2, 2021, cash and cash equivalents were $1,099.1 million, total debt was approximately $2,301.8 million net of issuance costs and discounts, and total equity was $4,757.5 million. The company had $1.75 billion of available revolving-credit capacity at quarter-end, with no revolver borrowings outstanding. The current portion of debt was $206.0 million and long-term debt was $2,095.8 million.
Material changes versus the prior comparable period
- Third-quarter sales declined 13% year over year, primarily because industry vehicle production fell 19% and semiconductor shortages caused production downtime and cancellations. Management estimated that production disruptions reduced nine-month sales by approximately 16%.
- Third-quarter gross margin fell to 5.3% from 9.0%, reflecting lower production volumes, customer price reductions, higher commodity costs, labor shortages, logistics costs, and inefficiencies.
- Third-quarter Seating sales declined 14% to $3,166.2 million, while segment margin fell to 4.0% from 6.8%. E-Systems sales declined 9% to $1,102.0 million, and its segment margin fell to negative 0.7% from 7.1%.
- Despite the weak third quarter, nine-month sales increased 22%, gross margin improved to 7.8%, and Lear returned to profitability, primarily because the 2020 comparable period included COVID-19 production shutdowns and because of new business.
- Nine-month segment earnings increased to $560.5 million from $157.9 million. Seating earnings were $670.9 million versus $320.4 million; E-Systems earnings were $108.4 million versus $5.0 million.
- Operating cash flow increased by $240.9 million, but inventories increased substantially to $1,766.0 million from $1,401.1 million, reflecting unpredictable production schedules and supply shortages.
- Share repurchases resumed in the second quarter of 2021. Through October 2, Lear repurchased 589,717 shares for $99.3 million of cash, with $1,329.7 million remaining under the authorization. The third-quarter dividend was increased to $0.50 per share.
Guidance, outlook, commentary, risks and unusual items
- Management estimated 2021 capital spending of approximately $600 million. No consolidated revenue or earnings guidance is provided in the filing text.
- Lear recorded $78.0 million of restructuring charges and approximately $10 million of related manufacturing inefficiency costs in the first nine months. Approximately $37 million of additional restructuring costs were expected for actions initiated through October 2, 2021.
- A $46.0 million gain from a favorable Brazilian indirect-tax ruling materially benefited nine-month other income. Other unusual items included a $9 million intangible-asset impairment, a $1 million affiliate impairment, and tax expense associated with valuation allowances.
- On October 28, 2021, Lear amended its credit agreement, increasing revolver capacity from $1.75 billion to $2.0 billion and extending maturity to October 28, 2026. The $250 million term loan remains scheduled to mature August 8, 2022.
- On October 28, 2021, Lear agreed to acquire substantially all of Kongsberg Automotive’s Interior Comfort Systems business for approximately €175 million, subject to approvals and closing conditions, with expected closing in the first quarter of 2022.
- Principal risks include semiconductor and other supply shortages, COVID-19 recurrence, lower vehicle production, labor shortages, commodity and logistics inflation, customer price reductions, customer and supplier financial condition, foreign-exchange movements, restructuring execution, product liability and recalls, cybersecurity, legal and environmental matters, and potential asset impairments.
- Recorded reserves at October 2, 2021 included $17.5 million for legal disputes, $43.6 million for product liability and warranty claims, and $8.4 million for environmental matters. Management stated that outcomes remain uncertain.
Most important facts for investors to verify
- Whether semiconductor availability and global vehicle production recover sufficiently to support sales and restore quarterly margins.
- Whether higher commodity, labor, logistics, and restructuring costs can be recovered through customer pricing and operational improvements.
- The conversion of reported earnings into cash, particularly the effect of elevated inventories and working-capital requirements.
- Debt maturity and refinancing plans for the term loan due August 2022, notwithstanding the expanded revolver and extended maturity.
- The timing, purchase accounting, regulatory approvals, and integration risks associated with the Kongsberg acquisition.
- The sustainability of dividends and share repurchases given capital spending, restructuring needs, acquisition funding, and automotive-cycle volatility.