Lear Corporation Form 10-Q Summary
Business Context and Reporting Period
Lear is a global Tier 1 automotive supplier of complete seating systems and electrical power management systems (EPMS), serving major automotive manufacturers worldwide. This unaudited Form 10-Q covers the three and six months ended July 2, 2011, compared with July 3, 2010. Lear operates on a thirteen-week quarterly reporting calendar and emerged from Chapter 11 bankruptcy in November 2009 using fresh-start accounting.
Financial Performance and Position
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net sales | $3,676.3 million | $3,039.3 million | $7,188.0 million | $5,977.8 million |
| Gross profit | $346.6 million | $292.8 million | $670.0 million | $547.6 million |
| Gross margin | 9.4% | 9.6% | 9.3% | 9.2% |
| Income before taxes | $205.4 million | $182.6 million | $408.1 million | $262.8 million |
| Net income attributable to Lear | $177.5 million | $159.8 million | $333.5 million | $225.9 million |
| Diluted EPS | $1.65 | $1.48 | $3.09 | $2.09 |
| Operating cash flow | Not separately provided | Not separately provided | $360.9 million | $266.0 million |
Q2 sales increased 21.0%, while six-month sales increased 20.2%. Six-month gross profit rose 22.4%, and Lear-attributable net income increased 47.6%. Q2 diluted EPS increased 11.5%; six-month diluted EPS increased 47.8%. Q2 net income margin was approximately 4.8%, versus 5.3% in the prior-year quarter; six-month net income margin was approximately 4.6%, versus 3.8%.
- Seating sales increased 18.8% in Q2 and 18.3% for the first half; seating segment margin was 7.8% in Q2 and 7.7% for the first half.
- EPMS sales increased 29.2% in Q2 and 27.6% for the first half; EPMS segment margin improved to 5.9% in Q2 and 5.8% for the first half.
- Cash and cash equivalents were $1,771.2 million at July 2, 2011, up from $1,654.1 million at December 31, 2010.
- Total assets were $7,539.0 million, compared with $6,621.1 million at year-end 2010. Equity was $2,901.9 million, compared with $2,568.8 million.
- Accounts receivable increased to $2,279.7 million from $1,758.4 million, and inventories increased to $657.6 million from $554.2 million, largely reflecting higher production volumes.
Cash Flow, Debt, and Liquidity
- Six-month operating cash flow was $360.9 million, compared with $266.0 million in 2010.
- Investing cash usage was $135.5 million, including $156.2 million of capital expenditures versus $76.4 million in the prior-year period. Management estimated 2011 capital spending at approximately $325 million.
- Financing cash usage was $153.0 million, including $100.0 million of share repurchases, $25.7 million of dividends to Lear shareholders, $18.2 million of dividends to noncontrolling interests, and $4.8 million of debt issuance costs.
- Long-term debt was $695.1 million, consisting of $350 million of 7.875% senior notes due 2018 and $350 million of 8.125% senior notes due 2020. Short-term borrowings were $2.5 million.
- On June 17, 2011, Lear amended and restated its revolving credit agreement, increasing availability from $110 million to $500 million and extending maturity to June 17, 2016. No borrowings were outstanding at July 2, 2011.
- Management stated that Lear was in compliance with its debt covenants and had approximately $1.8 billion of cash plus $500 million of available revolver capacity.
Material Changes Versus the Prior Comparable Period
- Revenue growth reflected new business, higher production volumes on Lear platforms, and favorable foreign exchange. For Q2, these factors contributed approximately $238 million, $224 million, and additional platform-related benefits, respectively; for the first half, new business, production volumes, and foreign exchange contributed approximately $425 million, $397 million, and $246 million.
- Operating performance and restructuring benefits improved profitability, but selling-price reductions, commodity costs, launch costs, and program development costs remained offsets. Q2 gross margin declined modestly to 9.4% from 9.6%; first-half gross margin improved to 9.3% from 9.2%.
- Q2 other expense was $4.1 million versus $22.5 million of other income in 2010, primarily because of lower affiliate income and unfavorable foreign exchange.
- Six-month interest expense declined to $14.0 million from $32.3 million, primarily due to lower debt levels and a favorable foreign-tax settlement.
- Six-month restructuring charges were $4.6 million, compared with $26 million of restructuring-related costs, including manufacturing inefficiencies, in the prior-year period. Lear expects approximately $100 million of restructuring actions and related investments during 2011 and approximately $41.7 million of additional costs related to actions initiated by July 2.
- Tax expense increased to $59.7 million from $23.7 million, although the 2011 period included a $19.5 million tax benefit from reversing a foreign subsidiary valuation allowance. The 2010 period included approximately $32.8 million of tax benefits from reduced tax reserves.
Guidance, Outlook, Risks, and Unusual Items
- Management expected global automotive production trends to remain favorable, citing first-half North American production growth of approximately 8.4% and European growth of approximately 4.2% versus 2010.
- Lear did not provide a clear full-year revenue or earnings-per-share guidance figure in the filing. It did estimate approximately $325 million of 2011 capital expenditures and approximately $100 million of restructuring actions and related investments.
- The March 2011 Japan earthquake and tsunami caused intermittent customer downtime and electronic-component shortages, but the second-quarter impact was not material and management did not anticipate a material full-year impact.
- Principal risks include vehicle production declines, customer platform losses or insourcing, customer price reductions, supplier distress or disruption, commodity and energy inflation, launch costs, foreign exchange, labor issues, product liability and recalls, legal and environmental matters, pension assumptions, tax-attribute limitations, impairment risk, and restrictions under debt agreements.
- Legal reserves were $20.4 million, product liability and warranty reserves were $40.9 million, and environmental reserves were $2.6 million at July 2, 2011. A 49% guarantee of approximately $2 million of debt of Tacle Seating USA was outstanding.
- An arbitration dispute concerning royalties for garage door opener products was settled on July 28, 2011, after the quarter-end but before the filing date.
- Lear authorized a three-year, $400 million share repurchase program, repurchased $100 million of shares during the first half, and had $300 million remaining under the authorization. It also completed a two-for-one stock split and declared quarterly dividends of $0.125 per share.
Most Important Facts to Verify
- Whether revenue growth and segment-margin improvements persist after adjusting for foreign exchange, production recovery, new business, and tax benefits.
- The cash impact and completion schedule of the planned 2011 restructuring actions and capital expenditures.
- Working-capital requirements, particularly the increase in receivables and inventories, and the sustainability of operating cash flow.
- Liquidity after dividends, share repurchases, debt service, customer tooling expenditures, and potential supplier or customer disruptions.
- Exposure to commodity costs, foreign exchange, automotive production levels, customer price reductions, and vehicle-platform concentration.
- Potential changes in tax valuation allowances, tax-attribute utilization, warranty and recall liabilities, and legal or environmental reserves.
- Debt covenant compliance and the availability of the $500 million revolving credit facility.