Lear Corporation — Q1 2014 Form 10-Q Summary
Business context and reporting period
Lear designs and manufactures automotive seating and electrical distribution systems and related components for global automotive original equipment manufacturers. The filing covers the thirteen-week quarter ended March 29, 2014, compared with the quarter ended March 30, 2013. Reportable segments were Seating and Electrical.
Global automotive production increased approximately 5% year over year to 21.7 million units. North American, European and African, and Asian production increased, while South American production declined 8%.
Financial performance and position
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Net sales | $4,359.8 million | $3,947.1 million | Up 10% |
| Gross profit | $360.5 million | $312.4 million | Up 15% |
| Gross margin | 8.3% | 7.9% | Up 40 basis points |
| Income before taxes and equity earnings | $169.3 million | $146.8 million | Up 15% |
| Net income attributable to Lear | $122.0 million | $108.5 million | Up 12% |
| Diluted earnings per share | $1.47 | $1.13 | Up 30% |
| Net cash from operating activities | $(54.2) million | $63.8 million | Declined $118.0 million |
| Capital expenditures | $96.4 million | $98.7 million | Down $2.3 million |
- Seating sales increased 11% to $3,225.9 million; segment earnings increased to $152.2 million, while margin declined to 4.7% from 4.9%.
- Electrical sales increased 10% to $1,133.9 million; segment earnings increased to $138.3 million and margin expanded to 12.2% from 8.6%.
- SG&A was $136.7 million, or 3.1% of sales, compared with $129.6 million, or 3.3%, in the prior-year quarter. Material cost was 67.7% of sales versus 67.2%.
- Cash and cash equivalents were $919.4 million at March 29, 2014, down from $1,137.7 million at year-end 2013. The company also had a $1.0 billion revolving credit facility with no borrowings outstanding.
- Long-term debt was $1,068.6 million, compared with $1,057.1 million at December 31, 2013. Total debt consisted of senior notes due 2020, 2023 and 2024.
- Current assets were $5,561.0 million and current liabilities were $4,169.4 million, implying a current ratio of approximately 1.3x.
Material changes versus the prior comparable period
- Sales growth reflected approximately $270 million from new business and $110 million from improved production volumes on key Lear platforms.
- Gross profit benefited from favorable operating performance, restructuring actions, new business and higher production volumes, but was negatively affected by approximately $83 million of selling-price reductions and key seating-platform changeovers.
- Operating cash flow changed from a $63.8 million source to a $54.2 million use, primarily because working capital consumed $286.8 million versus $159.6 million in the prior-year quarter. Accounts receivable alone used $754.5 million.
- Other expense increased to $29.2 million from $10.7 million, including an $18 million loss on debt extinguishment versus $4 million in the prior-year period and higher foreign-exchange losses.
- Average diluted shares declined to 82.8 million from 95.9 million, contributing to the increase in diluted EPS.
- There were no first-quarter 2014 share repurchases; the accelerated share repurchase agreement ended March 31, 2014, with a subsequent $55.5 million cash settlement in the second quarter.
Guidance, outlook, commentary, risks and unusual items
- Management estimated 2014 capital spending at approximately $450 million. The filing does not provide clear full-year revenue, earnings or cash-flow guidance.
- Management expects to continue quarterly dividends and may continue share repurchases, subject to financial condition, market conditions, capital needs, alternative uses of capital and debt-facility limitations.
- Q1 2014 restructuring charges were $24.3 million, with approximately $1 million of related manufacturing inefficiency charges. Management expected approximately $80.6 million of additional restructuring costs for activities initiated through March 29, 2014.
- Lear issued $325 million of 5.375% senior notes due 2024 and used the proceeds, together with cash, to redeem the remaining $280 million of 2018 notes and $35 million of the original 2020 notes. The refinancing extended maturities but resulted in an $18 million extinguishment loss.
- The company reported approximately $100 million of valuation allowances against certain international deferred tax assets at December 31, 2013 and stated that some allowance could be reversed as early as the fourth quarter of 2014 if profitability persists.
- Key risks include vehicle production levels, customer platform performance and pricing pressure, raw-material and commodity costs, supplier disruptions, labor issues, foreign-exchange movements, restructuring execution, recalls and warranty claims, legal proceedings, environmental obligations, liquidity and debt restrictions, and international operations.
- Pending automotive wire-harness antitrust litigation remains unresolved; the possible loss cannot reasonably be estimated. Recorded reserves included approximately $19.4 million for legal disputes, $32.2 million for product liability and warranty claims, and $4.9 million for environmental matters.
- Management stated that disclosure controls were effective and that there were no material changes in internal control over financial reporting. The filing reports no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether sales growth and improved segment performance continue after accounting for platform launches, production volumes, price reductions and restructuring benefits.
- The timing and total cost of the remaining restructuring activities and their effect on margins and cash flow.
- Working-capital trends, particularly accounts receivable and inventory, and whether operating cash flow normalizes.
- The sustainability of the 12.2% Electrical segment margin and the recovery of Seating segment margin from 4.7%.
- Future use of the approximately $1.0 billion revolving facility, debt maturities, covenant compliance and the benefits of the 2024 refinancing.
- Potential tax benefits from any reversal of international valuation allowances and the resulting effect on effective tax rates.
- Developments in antitrust, product liability, warranty, environmental and other legal matters, for which ultimate outcomes remain uncertain.
- Post-quarter share-repurchase activity, including the $55.5 million ASR settlement and the remaining authorization of approximately $694.5 million.