Lear Corporation 2016 Second-Quarter Form 10-Q Summary
Business Context and Reporting Period
Lear Corporation designs and manufactures automotive seating, electrical distribution systems, electronic modules, and related components for global automotive original equipment manufacturers. The filing covers the unaudited three and six months ended July 2, 2016, compared with June 27, 2015. Global light-vehicle production increased approximately 2% in the first half of 2016, with growth in North America, Europe and Africa, and Asia partially offset by a 22% decline in South America.
Financial Performance and Position
| Metric | Q2 2016 | Q2 2015 | Six Months 2016 | Six Months 2015 |
|---|---|---|---|---|
| Net sales | $4,724.8 million | $4,635.1 million | $9,387.7 million | $9,156.5 million |
| Gross profit | $540.4 million | $450.2 million | $1,076.1 million | $875.9 million |
| Gross margin | 11.4% | 9.7% | 11.5% | 9.6% |
| Net income attributable to Lear | $282.4 million | $181.9 million | $530.8 million | $329.2 million |
| Diluted EPS | $3.82 | $2.33 | $7.11 | $4.19 |
| Operating cash flow | Not separately provided | Not separately provided | $817.6 million | $408.0 million |
Q2 sales increased 2%, while six-month sales increased 3%. Net income attributable to Lear rose 55% in Q2 and 61% for the first six months. Earnings benefited from favorable operating performance, restructuring actions, new business, higher production volumes, improved equity-affiliate results, and lower interest and foreign-exchange-related expense. Average diluted shares declined to 73.9 million in Q2 and 74.7 million for the first half, from 78.1 million and 78.6 million, respectively, supporting EPS growth.
Seating generated Q2 sales of $3,640.4 million and segment earnings of $287.7 million, with a 7.9% margin versus 6.0% in the prior-year quarter. Electrical generated sales of $1,084.4 million and segment earnings of $151.4 million, with a 14.0% margin versus 13.4%. For the first half, seating margin improved to 8.0% from 5.8%, and electrical margin improved to 14.0% from 13.3%.
At July 2, 2016, cash and cash equivalents were $1,394.7 million, compared with $1,196.6 million at December 31, 2015. Total assets were $10,140.5 million and equity was $3,156.1 million. Total debt, including current and long-term portions, was approximately $1,950.8 million, comprising $1,475 million of senior notes, approximately $481 million of term-loan borrowings, and other debt. The company had no revolver borrowings and $1.25 billion of available revolving-credit capacity.
Six-month investing cash use was $131.2 million, including $181.7 million of capital expenditures. Capital expenditures were estimated at approximately $525 million for full-year 2016. Financing cash use was $483.9 million, including $367.1 million of cash paid for share repurchases and $47.0 million of dividends. Free cash flow, as a defined non-GAAP measure, was not provided in the filing.
Material Changes Versus the Prior Comparable Period
- Gross margin increased 170 basis points in Q2 and 190 basis points for the first half.
- Operating cash flow more than doubled year over year, partly due to improved net income and favorable working-capital timing; management noted that the working-capital benefit was affected by the timing of quarter-end.
- Other income improved by $32.2 million in Q2 and $53.7 million for the first half, primarily because 2016 included a $30.3 million gain from consolidating Beijing BAI, while 2015 included a $14.3 million loss on debt extinguishment and higher foreign-exchange losses.
- Lear gained control of Beijing BAI in June 2016 and began consolidating it in the seating segment. The transaction added provisional assets, including $13.1 million of goodwill and $34.0 million of customer-related intangible assets, and increased noncontrolling interests by $40.0 million.
- Restructuring charges declined to $36.3 million in the first half from the higher comparable-period burden; the company also recorded approximately $4 million of related manufacturing inefficiency charges.
- The company repurchased $405.0 million of common stock in the first half, or 3.7 million shares at an average $109.65 per share. Remaining authorization was $595.0 million as of the report date.
- Quarterly dividends increased to $0.30 per share from $0.25 per share, a 20% increase.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
The filing does not provide a clear consolidated revenue or earnings outlook. Management estimated 2016 capital expenditures of approximately $525 million and expected approximately $10 million to $15 million of pension contributions. The company expects to incur approximately $56 million of additional restructuring costs related to actions initiated as of July 2, 2016.
Management expects cash on hand, operating cash flow, and available revolver capacity to satisfy ordinary-course liquidity needs, while continuing dividends and authorized share repurchases. Debt covenants were reported to be in compliance. Scheduled cash interest payments for the remaining six months of 2016 were approximately $42 million.
Key risks include vehicle-production volatility, loss or reduced production of supplied vehicle platforms, customer-imposed price reductions, supplier and labor disruptions, raw-material and commodity inflation, foreign-exchange exposure, restructuring execution, product liability and recall claims, cybersecurity, joint-venture performance, environmental matters, legal proceedings, pension assumptions, tax valuation allowances, and limitations imposed by indebtedness. The filing added Brexit as a specific risk because of potential effects on European and U.K. operations, customers, suppliers, tariffs, currencies, and regulations.
Recorded reserves at July 2, 2016 included approximately $12.4 million for legal disputes, $49.9 million for product liability and warranty claims, and $9.1 million for environmental matters. The company states that ultimate outcomes are uncertain and may differ materially from current estimates.
Most Important Facts for Investors to Verify
- Whether gross-margin improvement and restructuring benefits are sustainable after adjusting for the $30.3 million Beijing BAI consolidation gain and other tax benefits.
- The timing and total cost of the approximately $56 million of remaining restructuring activities and associated manufacturing inefficiencies.
- Whether operating cash flow remains strong after working-capital timing effects and as capital spending approaches the $525 million full-year estimate.
- The pace and funding of additional share repurchases relative to debt reduction, capital expenditures, dividends, and liquidity needs.
- Future vehicle-production levels, customer pricing actions, platform launches, and regional foreign-exchange effects.
- The final purchase-accounting values and operating contribution of Beijing BAI, including potential changes to provisional fair-value estimates.
- Developments in product liability, warranty, environmental, antitrust, commercial disputes, and Brexit-related exposures.
- The effect of pending accounting standards, particularly share-based compensation, revenue recognition, and lease accounting, on future reported results and equity.