Lear Corporation 2012 First-Quarter Form 10-Q Summary
Business context and reporting period
Lear Corporation is a global Tier 1 automotive supplier that designs and manufactures complete seating systems, seating components, electrical distribution systems and related components for automotive original equipment manufacturers. The company reports through Seating and Electrical Power Management Systems (EPMS) segments and operates worldwide.
The filing covers the unaudited thirteen-week quarter ended March 31, 2012, compared with the quarter ended April 2, 2011. Lear emerged from Chapter 11 in November 2009 and applies fresh-start accounting.
Financial performance and liquidity
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Net sales | $3,644.0 million | $3,511.7 million | +3.8% |
| Gross profit | $309.8 million | $323.4 million | -$13.6 million |
| Gross margin | 8.5% | 9.2% | -70 basis points |
| Consolidated net income | $144.4 million | $162.7 million | -$18.3 million |
| Net income attributable to Lear | $134.1 million | $156.0 million | -$21.9 million |
| Diluted EPS | $1.32 | $1.44 | -$0.12 |
| Cash flow from operations | $4.2 million | $154.2 million | -$150.0 million |
| Capital expenditures | $70.3 million | $70.5 million | Approximately flat |
Sales growth reflected $153 million from new business and $27 million from improved production volumes, partly offset by foreign-exchange effects. Cost of sales increased to $3,334.2 million, or 91.5% of sales, from 90.8% in the prior-year quarter. Management attributed the gross-margin decline to customer price reductions, higher product and facility launch costs, and program development costs, partly offset by operating improvements, restructuring benefits and new business.
- Seating sales increased 3.3% to $2,813.8 million; segment earnings declined to $185.8 million from $208.5 million, and margin declined to 6.6% from 7.7%.
- EPMS sales increased 5.5% to $830.2 million; segment earnings rose to $52.6 million from $44.1 million, and margin improved to 6.3% from 5.6%.
- SG&A declined to $116.1 million from $117.5 million, while SG&A as a percentage of sales improved to 3.2% from 3.3%.
- Interest expense increased to $12.5 million from $3.3 million, primarily because the prior-year period benefited from an interest refund related to a favorable foreign tax settlement.
- The effective tax rate was 22.6%, compared with 20.1% in the prior-year quarter. The rate was affected by the mix of earnings among jurisdictions, valuation allowances and expenses for which no tax benefit was expected.
Operating cash flow was constrained by working-capital investment, including a $456.8 million increase in accounts receivable and a $68.1 million increase in inventories, partly offset by a $309.9 million increase in accounts payable. Cash flow also reflected $46.9 million of cash restructuring expenditures and lower collections of customer engineering, development and tooling costs.
Cash and cash equivalents totaled $1,630.9 million at March 31, 2012, down from $1,754.3 million at December 31, 2011. Approximately $823 million was held by foreign subsidiaries. Total current assets were $5,245.0 million versus current liabilities of $3,437.0 million. Long-term debt was $695.5 million, consisting principally of senior unsecured notes due in 2018 and 2020. Lear had no borrowings under its $500 million revolving credit facility and no short-term debt outstanding. The company stated that it was in compliance with all debt covenants.
Material changes versus the prior comparable period
- Revenue increased, but lower gross margin and higher interest expense reduced Lear-attributable net income by 14.0% and diluted EPS by 8.3%.
- Operating cash generation fell sharply to $4.2 million from $154.2 million, primarily because of working-capital needs, restructuring payments, facility launches and customer tooling-related activity.
- Restructuring charges increased to approximately $5.2 million from approximately $2 million, while cash restructuring expenditures totaled approximately $46.9 million.
- Share repurchases increased to $52.5 million from $27.4 million. The repurchase authorization was increased from $400 million to $700 million; $368.4 million remained available at quarter-end.
- The quarterly dividend increased to $0.14 per share from $0.125 per share.
- Equity in net income of affiliates increased to $9.7 million from $4.1 million, reflecting improved affiliate performance.
- Comprehensive income attributable to Lear was $201.0 million versus $227.8 million, with 2012 benefiting from derivative and foreign-currency-related gains recorded in other comprehensive income.
Guidance, outlook, commentary, risks and unusual items
- Management expects 2012 capital spending of approximately $455 million, including approximately $30 million of replacement assets associated with a 2011 facility fire.
- Restructuring actions and related investments are expected to moderate during 2012 and thereafter. Approximately $12 million of additional restructuring costs were expected for actions initiated as of March 31, 2012.
- Lear expected 2012 domestic and foreign pension contributions of $35 million to $40 million, plus approximately $14.5 million of defined-contribution plan contributions.
- On April 11, 2012, Lear agreed to acquire Guilford Mills for approximately $260 million, subject to customary closing conditions and regulatory approvals. Closing was expected in the second quarter of 2012; Guilford had annual sales of approximately $400 million.
- The company recognized $1.6 million of insurance-related income in the quarter and received $8.5 million of insurance proceeds related to the 2011 European facility fire. Cumulative fire-related losses and incremental costs were $34.7 million, partially offset by cumulative recoveries.
- Lear faces automotive-sector risks from vehicle production levels, customer platform performance, customer price reductions, launches, supplier disruptions, raw-material and energy costs, foreign exchange, labor matters, and customer or supplier financial distress.
- Pending automotive wire-harness antitrust class actions in the United States and Canada seek unspecified damages and other relief. The bankruptcy court ruled that pre-emergence claims were enjoined, while post-emergence claims could proceed; Lear was appealing. The potential loss could not reasonably be estimated.
- Recorded reserves included $14.7 million for legal disputes, $22.7 million for product liability and warranty matters, and $2.8 million for environmental matters.
- The company identified information-technology system disruption as a supplemental risk factor. It also noted potential volatility from tax valuation allowances, including a possible significant U.S. valuation-allowance reversal in the second half of 2012 if profitability and forecasts remained favorable.
Important facts for investors to verify
- Whether sales growth converts into sustainable earnings growth as customer price reductions and launch costs affect gross margin.
- Whether working-capital investment normalizes and operating cash flow improves after the weak first quarter.
- The timing, funding and financial contribution of the proposed $260 million Guilford Mills acquisition.
- Actual 2012 capital expenditures, restructuring costs and cash restructuring payments versus management expectations.
- The effect of foreign exchange, commodity prices, vehicle production and customer platform volumes on segment margins.
- Developments and potential exposure in the wire-harness antitrust litigation, product liability claims and recall-related matters.
- Any reversal of U.S. or foreign tax valuation allowances and the resulting impact on tax expense and net income.
- Compliance with debt covenants, availability under the revolving credit facility, and the balance of cash held in foreign subsidiaries.