LEAR CORP quarterly report, Q2 FY2017

Lear Corporation Form 10-Q Summary

Business Context and Reporting Period

Lear Corporation is a global Tier 1 automotive supplier of seating systems and components, electrical distribution systems, electronic modules, software and related technologies. The unaudited Form 10-Q covers the 13-week quarter and six months ended July 1, 2017, compared with the periods ended July 2, 2016.

Global light-vehicle production increased 3% year over year in the first half of 2017 to 46.4 million units. Lear operates primarily through its Seating and E-Systems segments and serves major global automotive manufacturers.

Financial Performance and Metrics

Metric	Q2 2017	Q2 2016	First Half 2017	First Half 2016
Net sales	$5,123.2 million	$4,724.8 million	$10,121.7 million	$9,387.7 million
Gross profit	$577.8 million	$540.4 million	$1,160.3 million	$1,076.1 million
Gross margin	11.3%	11.4%	11.5%	11.5%
Net income attributable to Lear	$311.9 million	$282.4 million	$617.7 million	$530.8 million
Diluted earnings per share	$4.49	$3.82	$8.84	$7.11
Effective tax rate	19.2%	26.9%	21.0%	27.7%

Q2 sales increased 8%, while first-half sales increased 8%. Management attributed growth primarily to new business and the Antolin Seating acquisition.
Q2 net income attributable to Lear increased 10%; first-half net income increased 16%. Diluted EPS benefited from higher earnings and lower average shares outstanding.
Q2 and first-half gross margins were broadly stable year over year. Favorable operating performance and restructuring benefits were offset by customer price reductions and foreign-exchange effects.
Q2 Seating sales increased 11% to $4.0 billion, with an 8.0% segment margin versus 7.9%. First-half Seating sales increased 9% to $7.9 billion, with an 8.1% margin versus 8.0%.
Q2 E-Systems sales increased 1% to $1.1 billion, with a 14.2% segment margin versus 14.0%. First-half sales increased 4% to $2.2 billion, with a 14.4% margin versus 14.0%.

Cash Flow, Balance Sheet, Debt and Liquidity

First-half operating cash flow was $845.3 million, compared with $817.6 million in the prior-year period.
Investing cash outflows were $566.3 million, including $274.0 million of capital expenditures and $286.8 million paid for the Antolin Seating acquisition. Management estimated 2017 capital spending of approximately $560 million.
Financing cash outflows were $416.9 million, including $239.7 million of share repurchases, $70.7 million of dividends paid to Lear stockholders and $15.6 million of term-loan repayments.
Cash and cash equivalents were $1,166.7 million at July 1, 2017, down from $1,271.6 million at December 31, 2016. Approximately $812 million was held in foreign subsidiaries and was generally available for repatriation without additional income tax expense.
Total debt, including current and long-term portions and before certain presentation adjustments, was approximately $1.92 billion at July 1, 2017. The company had $453.1 million outstanding under its term loan, no borrowings under its $1.25 billion revolving facility, and $3.9 million of short-term borrowings.
Lear reported approximately $1.25 billion of available revolving-credit capacity and stated that liquidity was sufficient for ordinary business needs, debt service, dividends and authorized repurchases.
Accounts receivable increased to $3,357.7 million and inventories increased to $1,127.4 million from December 31, 2016, reflecting higher sales and operating requirements.

Material Changes Versus the Prior Comparable Period

Lear completed the $291.5 million acquisition of Grupo Antolin’s automotive seating business on April 28, 2017. The business generated approximately $370 million of annual sales before acquisition and contributed less than 2% of Lear’s Q2 consolidated sales because it was included only from the acquisition date.
Goodwill increased to $1,272.1 million from $1,121.3 million, primarily because of $121.1 million of goodwill recognized in the Antolin Seating acquisition and foreign-currency translation.
First-half restructuring charges were $31.6 million, compared with approximately $40 million in the first half of 2016. Lear expects approximately $50 million of additional restructuring costs related to actions initiated as of July 1, 2017.
The effective tax rate declined substantially due to $54.4 million of net tax benefits in the first half of 2017, including the reversal of foreign deferred-tax valuation allowances and benefits from share-based compensation accounting. Lear adopted ASU 2016-09 and recorded a $54.5 million deferred-tax asset and retained-earnings credit.
Other income in the prior-year period included a $30.3 million gain from consolidation of an affiliate. The absence of that gain caused other income/expense to move from $23.5 million of income in Q2 2016 to $5.8 million of expense in Q2 2017.
Lear repurchased $254.3 million of common stock during the first half of 2017, compared with $405.0 million in the prior-year period, and increased its quarterly dividend to $0.50 per share from $0.30.

Guidance, Outlook, Commentary and Risks

Management did not provide a consolidated revenue or earnings guidance range in the filing. It estimated 2017 capital spending at approximately $560 million and pension contributions at approximately $10 million to $15 million.
Management identified connectivity, safety, efficiency, electrification, increasing vehicle electronic content, global platforms and growth in Asia as key long-term opportunities.
Key operating risks include vehicle-production volatility, loss or underperformance of major vehicle platforms, customer-imposed price reductions, supplier disruptions, labor disputes, raw-material and commodity inflation, foreign-exchange movements, program-launch costs, restructuring execution, cybersecurity, legal claims, product recalls and customer or supplier financial distress.
Legal, product-liability and environmental reserves were approximately $9 million, $58 million and $9 million, respectively, at July 1, 2017. The filing states that ultimate outcomes remain uncertain and actual costs could differ materially from recorded reserves.
Lear was in compliance with its debt covenants. The senior notes mature in 2023, 2024 and 2025; the revolving facility matures in 2019 and the term loan in 2020.
Disclosure controls were considered effective. Antolin Seating was excluded from management’s internal-control evaluation as permitted by SEC rules while integration continued.

Important Facts for Investors to Verify

Whether Antolin Seating integration, synergies and preliminary purchase-price allocations develop as expected.
The timing and total cost of the approximately $50 million of remaining restructuring actions and their effect on margins and cash flow.
Whether operating cash flow can support approximately $560 million of annual capital spending, dividends, share repurchases and debt service without materially reducing liquidity.
The sustainability of the unusually low 2017 effective tax rate after the identified valuation-allowance and share-based-compensation benefits.
Exposure to customer price reductions, raw-material costs, foreign-exchange movements and production changes across major vehicle platforms.
Potential changes in warranty, recall, product-liability, environmental and commercial-dispute reserves.
The remaining $745.7 million share-repurchase authorization and the limitations imposed by the credit agreement.