Lear Corporation 2019 Q3 Form 10-Q Summary
Business context and reporting period
Lear designs and manufactures automotive seating, electrical distribution systems, electronic modules, electrification products, connectivity products and related software for global automotive manufacturers. The filing covers the unaudited thirteen-week quarter and nine months ended September 28, 2019, compared with September 29, 2018. Global light-vehicle production declined approximately 6% in the first nine months of 2019, with declines in every reported region.
Key financial metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Net sales | $4,825.0 million | $4,891.6 million | $14,992.7 million | $16,206.1 million |
| Gross profit / margin | $459.3 million / 9.5% | $526.3 million / 10.8% | $1,410.7 million / 9.4% | $1,795.8 million / 11.1% |
| Net income attributable to Lear | $215.9 million | $252.5 million | $627.6 million | $937.6 million |
| Diluted EPS | $3.58 | $3.80 | $10.23 | $13.80 |
| Operating cash flow | Not separately provided | Not separately provided | $799.3 million | $1,021.6 million |
| Capital expenditures | $150.8 million | $160.5 million | $410.1 million | $492.7 million |
- Q3 sales declined 1%; nine-month sales declined 7%, primarily due to lower vehicle production and foreign exchange, partly offset by new business.
- Q3 pretax income before taxes and equity income was $267.0 million, compared with $328.9 million; the nine-month figure was $820.8 million, compared with $1,220.3 million.
- Q3 effective tax rate was 12.5%, compared with 17.5%; the nine-month rate was 18.3%, compared with 19.1%. Results included a $28.6 million R&D tax credit benefit and other discrete tax benefits.
- Cash and cash equivalents were $1,300.9 million at September 28, 2019, compared with $1,493.2 million at December 31, 2018. Cash, cash equivalents and restricted cash totaled $1,323.3 million.
- Debt included $2,314.7 million of long-term debt, net of issuance costs and discounts, plus $18.7 million of short-term borrowings and $17.1 million of current long-term debt. Net debt was approximately $1.05 billion using balance-sheet cash and debt presented in the filing.
- Lear had no borrowings under its $1.75 billion revolving credit facility and had approximately $1.75 billion of available capacity. The $250 million term loan had $239.0 million outstanding.
- Lear declared quarterly dividends of $0.75 per share, up from $0.70 per share in the comparable 2018 periods, and repurchased 2.6 million shares for $359.7 million of cash during the first nine months.
Material changes versus the prior comparable period
- Seating Q3 sales increased 1% to $3,715.0 million, but segment margin decreased to 7.6% from 8.0%. Nine-month sales decreased 7% to $11,468.1 million and margin decreased to 7.1% from 8.0%.
- E-Systems Q3 sales decreased 8% to $1,110.0 million, while margin fell to 6.7% from 11.5%. Nine-month sales decreased 10% to $3,524.6 million and margin fell to 8.2% from 12.9%.
- Lower production volumes and foreign exchange reduced Q3 sales by approximately $392 million in aggregate, partly offset by $326 million from new business. For the nine months, production and foreign exchange reduced sales by approximately $1.95 billion, partly offset by $767 million of new business.
- Restructuring costs increased to $122.9 million in the first nine months from $47.9 million, with related manufacturing inefficiency charges of approximately $5 million versus $12 million. The company expects approximately $67 million of additional restructuring costs related to actions already initiated.
- Lear acquired connected-car software company Xevo on April 17, 2019, for $321.7 million net of cash acquired. The preliminary allocation included $219.6 million of goodwill and $93.2 million of intangible assets.
- Lear issued $700 million of senior notes in May 2019, used in part to redeem $325 million of 2024 notes and finance the Xevo acquisition. The refinancing resulted in an $10.6 million debt-extinguishment loss and increased interest expense.
- The company adopted the new lease standard on January 1, 2019, recognizing $438.1 million of right-of-use assets and $445.8 million of lease obligations without a significant reported impact on operating results or cash flows.
- Operating cash flow declined $222.3 million year over year, while investing cash use increased to $739.3 million, principally because of the Xevo acquisition and capital spending.
Guidance, outlook, commentary and risks
- Management estimated 2019 capital spending at approximately $625 million. The filing does not provide a clear consolidated revenue or earnings guidance figure.
- Management expects to fund restructuring activities, debt service, capital expenditures, dividends and share repurchases through operating cash flow, existing cash and available credit capacity.
- Additional restructuring costs of approximately $67 million related to existing actions are expected by the end of 2020; future actions may depend on market conditions, customer actions and regional production levels.
- Key risks include global vehicle-production declines, loss or reduced production of significant vehicle platforms, customer price reductions, raw-material and commodity inflation, supply-chain disruption, customer and supplier financial stress, labor issues, foreign exchange, tariffs and trade policies, debt limitations, pension assumptions, cybersecurity, warranty and recall costs, litigation, environmental matters and tax changes.
- Recorded reserves at September 28, 2019 included approximately $13.9 million for legal disputes, $29.9 million for product liability and warranty claims, and $9.3 million for environmental matters. Management stated that outcomes remain inherently uncertain.
- Lear was in compliance with the covenants governing its senior notes and credit agreement. The filing states that no material changes occurred in previously disclosed risk factors.
Most important facts for investors to verify
- Whether vehicle-production weakness, foreign exchange and customer pricing pressure continue to compress gross and segment margins, particularly in E-Systems.
- Whether the expected $67 million of remaining restructuring costs produce the projected operating benefits and whether further restructuring becomes necessary.
- Xevo’s integration progress, contribution to revenue and earnings, and the ultimate valuation of its provisional goodwill and intangible assets.
- Liquidity after funding capital expenditures, dividends, share repurchases, restructuring, lease obligations and debt service.
- The sustainability of earnings excluding the $28.6 million R&D tax credit and other discrete tax benefits.
- Potential exposure from customer concentration, product recalls, warranty claims, legal disputes, environmental matters and foreign currency movements.