Lear Corporation 2018 Q3 Form 10-Q Summary
Business Context and Reporting Period
Lear Corporation designs and manufactures automotive seating, electrical distribution systems, electronic modules, related components and software for global automotive original equipment manufacturers. The filing covers the unaudited thirteen-week quarter and nine months ended September 29, 2018, compared with September 30, 2017.
Lear reports two operating segments: Seating and E-Systems. Global light-vehicle production increased approximately 1% during the first nine months of 2018, with lower production in North America, flat production in Europe and Africa, and growth in Asia and South America.
Key Financial Metrics
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Net sales | $4,891.6 million | $4,981.5 million | $16,206.1 million | $15,103.2 million |
| Gross profit | $526.3 million | $555.9 million | $1,795.8 million | $1,716.2 million |
| Gross margin | 10.8% | 11.2% | 11.1% | 11.4% |
| Net income attributable to Lear | $252.5 million | $295.2 million | $937.6 million | $912.9 million |
| Diluted EPS | $3.80 | $3.96 | $13.80 | $12.80 |
| Operating cash flow | Not separately provided | Not separately provided | $1,021.6 million | $1,184.3 million |
| Capital expenditures | Not separately provided | Not separately provided | $492.7 million | $430.2 million |
Q3 net income attributable to Lear declined 14% and diluted EPS declined 4%, while nine-month net income increased 3% and diluted EPS increased 8%, aided in part by lower average diluted shares outstanding. Q3 segment earnings were $363.3 million, compared with $385.2 million; nine-month segment earnings were $1,294.4 million, compared with $1,211.0 million.
- Seating Q3 sales decreased 5% to $3,683.0 million, while segment margin increased to 8.0% from 7.7%. Nine-month sales increased 4% to $12,287.6 million, with margin unchanged at 8.0%.
- E-Systems Q3 sales increased 9% to $1,208.6 million, but segment margin declined to 11.5% from 14.0%. Nine-month sales increased 17% to $3,918.5 million, while margin declined to 12.9% from 14.3%.
- Cash and cash equivalents were $1,198.6 million at September 29, 2018, compared with $1,500.4 million at December 31, 2017. Cash, cash equivalents and restricted cash totaled $1,224.9 million.
- Total debt, including current and long-term amounts, was approximately $1,963.8 million, excluding certain presentation differences and debt issuance costs. Short-term borrowings were $8.2 million.
- Lear had $1.75 billion of unused capacity under its revolving credit facility and stated that available liquidity was sufficient for ordinary-course requirements.
- Quarterly dividends were $0.70 per share, compared with $0.50 in the comparable 2017 periods. Lear paid $142.1 million of dividends to its stockholders during the first nine months.
Material Changes Versus the Prior Comparable Period
- Nine-month sales increased 7%, primarily from new business, favorable foreign-exchange effects, the Antolin Seating acquisition and consolidation of affiliates. These benefits were partly offset by lower production volumes on key platforms.
- Q3 sales declined 2% because lower production volumes, primarily in Europe and Asia, exceeded the benefit of new business. Nine-month sales growth was partly offset by lower production volumes in North America, Europe and Asia.
- Gross margin declined in both the quarter and nine-month period, reflecting selling-price reductions and lower production volumes, partly offset by favorable operating performance and restructuring benefits.
- Operating cash flow declined $162.7 million year over year to $1,021.6 million. Working capital used $328.8 million, compared with $31.0 million in the prior-year period, principally because of increases in receivables and inventories and the timing of payments.
- Investing cash outflows declined to $511.2 million from $700.1 million because 2017 included $286.8 million for the Antolin Seating acquisition. Capital expenditures nevertheless increased to $492.7 million from $430.2 million.
- Financing cash outflows increased to $753.2 million from $545.8 million, driven primarily by $488.1 million of share repurchases and $142.1 million of dividends to Lear stockholders.
- The company repurchased 2.7 million shares for aggregate consideration of $490.7 million during the first nine months, leaving approximately $1.014 billion under the authorization. Treasury shares increased to 8.0 million from 5.7 million at year-end 2017.
- The effective tax rate declined to 17.5% from 20.2% in Q3 and to 19.1% from 20.7% for the nine-month period, reflecting the U.S. tax-rate reduction and discrete tax benefits.
Guidance, Outlook, Commentary, Risks and Unusual Items
- Lear estimated 2018 capital expenditures of approximately $670 million. The filing does not provide clear full-year revenue or earnings guidance.
- Management highlighted growth opportunities from increasing electrical and electronic content, electrification, connectivity, safety and autonomous-driving technologies, particularly in Asia and China.
- The company incurred $48.2 million of restructuring costs in the first nine months and approximately $12 million of related manufacturing inefficiency charges. It expected approximately $20 million of additional restructuring costs for actions initiated as of September 29, 2018.
- In January 2018, Lear acquired EXO Technologies, a developer of high-accuracy GPS positioning technology for connected and autonomous vehicles. Lear also gained control of Lear FAWSN, recognizing a $10.0 million gain and recording approximately $20.9 million of goodwill.
- Tax results included a $36.4 million benefit from reversal of valuation allowances, a $9.3 million adjustment to provisional 2017 tax expense and other discrete benefits, partly offset by $22.0 million of foreign withholding tax expense. Accounting for certain Tax Cuts and Jobs Act provisions remained provisional and was expected to be finalized in the fourth quarter of 2018.
- Legal dispute reserves were $10.6 million, product liability and warranty reserves were $33.2 million, and environmental reserves were $8.9 million. The company stated that outcomes remain uncertain and actual costs could differ materially.
- Principal risks include vehicle production declines, loss or restructuring of customers, customer price reductions, supplier disruptions, labor issues, foreign-exchange and commodity volatility, tariffs and trade policy, recalls and warranty claims, cybersecurity, international operations, legal and environmental matters, pension performance, tax changes and liquidity or covenant constraints.
- Lear was in compliance with the covenants under its senior-note indentures and credit agreement. The company expected the adoption of the lease standard on January 1, 2019 to have a significant balance-sheet impact.
Most Important Facts for Investors to Verify
- Whether lower vehicle production and customer pricing continue to pressure Seating and E-Systems margins, particularly E-Systems.
- Whether restructuring actions deliver the reported operating benefits and whether additional costs exceed the approximately $20 million estimate.
- Whether working-capital investment continues to reduce operating cash conversion as sales grow.
- Progress against the estimated $670 million 2018 capital-expenditure plan and the effect on free cash flow.
- The sustainability of share repurchases and $0.70 quarterly dividends relative to operating cash flow, debt service and future investment needs.
- Final Tax Cuts and Jobs Act accounting, valuation-allowance changes and the resulting effective tax rate.
- Potential exposure from recalls, warranty claims, customer disputes, environmental matters, tariffs, commodities, foreign exchange and automotive production volatility.
- The balance-sheet and covenant effects of adopting the lease-accounting standard in 2019.