Lear Corporation Form 10-Q Summary
Business Context and Reporting Period
Lear Corporation is a global Tier 1 automotive supplier serving major vehicle manufacturers through two reportable segments: Seating and E-Systems, formerly Electrical. Products include complete seating systems, seat components, wiring systems, electronic control modules and wireless communication modules. The unaudited filing covers the thirteen-week quarter and nine months ended October 1, 2016, compared with September 26, 2015.
Financial Performance and Position
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Net sales | $4,526.4 million | $4,330.3 million | $13,914.1 million | $13,486.8 million |
| Gross profit | $513.9 million | $453.2 million | $1,590.0 million | $1,329.1 million |
| Gross margin | 11.4% | 10.5% | 11.4% | 9.9% |
| Net income attributable to Lear | $214.4 million | $181.0 million | $745.2 million | $510.2 million |
| Diluted EPS | $2.98 | $2.34 | $10.10 | $6.53 |
| Operating cash flow | Not separately provided | Not separately provided | $1,093.9 million | $686.0 million |
- Third-quarter sales increased 5%, while nine-month sales increased 3%. Management attributed growth primarily to new business and higher vehicle production in Asia, Europe and South America, partly offset by foreign exchange and customer price reductions.
- Q3 net margin attributable to Lear was approximately 4.7%, versus 4.2% in the prior-year quarter. Nine-month net margin was approximately 5.4%, versus 3.8%.
- Q3 Seating sales were $3,513.3 million, with segment earnings of $269.5 million and a 7.7% margin, compared with 7.0% in the prior-year quarter. E-Systems sales were $1,013.1 million, with segment earnings of $140.3 million and a 13.8% margin, compared with 13.6%.
- Nine-month Seating sales were $10,755.7 million and segment earnings were $848.8 million, producing a 7.9% margin. E-Systems sales were $3,158.4 million and segment earnings were $441.5 million, producing a 14.0% margin.
- Cash and cash equivalents were $1,341.6 million at October 1, 2016, compared with $1,196.6 million at December 31, 2015. Total current assets were $6,053.8 million and current liabilities were $4,483.3 million.
- Debt consisted primarily of $1,475 million of senior notes, $475.0 million outstanding under the term loan facility and $8.7 million of short-term borrowings. Reported current and long-term debt totaled approximately $1,939.9 million, net of debt issuance costs.
- Lear had a $1.25 billion undrawn revolving credit facility and stated that it was in compliance with applicable debt covenants.
- Capital expenditures were $300.3 million during the first nine months. Management estimated full-year 2016 capital spending of approximately $525 million.
- Cash used in financing activities was $699.4 million, including $557.7 million of share repurchases and $68.1 million of dividends paid to Lear stockholders.
Material Changes Versus the Prior Comparable Period
- Gross margin improved by 90 basis points in Q3 and 150 basis points for the first nine months. Management cited favorable operating performance, restructuring benefits and new business as the principal drivers.
- Net income attributable to Lear increased 18% in Q3 and 46% for the first nine months. Diluted EPS rose 27% in Q3 and 55% for the first nine months, aided by lower average diluted shares outstanding following repurchases.
- Operating cash flow increased by $407.9 million to $1,093.9 million, primarily due to higher earnings, improved working-capital cash flow and timing of accrued liabilities.
- Interest expense declined to $62.0 million from $66.3 million for the first nine months, while other income and expense improved from $60.4 million of expense to $0.8 million of income.
- 2016 results included a $30.3 million pretax gain from obtaining control of and consolidating Beijing BAI. The prior-year period included a $14.3 million loss on the redemption of senior notes and acquisition-related costs.
- Lear incurred $51.2 million of restructuring charges during the first nine months of 2016, plus approximately $5 million of related manufacturing inefficiency charges. The company expects approximately $50 million of additional restructuring costs related to actions initiated as of October 1, 2016.
- The quarterly dividend increased to $0.30 per share from $0.25 per share in the comparable 2015 periods. Lear repurchased 5.0 million shares for $557.7 million during the first nine months and had $442.3 million of remaining authorization at quarter-end.
- Global light vehicle production increased approximately 3% during the first nine months, with growth in North America, Europe and Africa, and Asia partly offset by a 16% decline in South America.
Guidance, Outlook, Risks and Unusual Items
- The filing provides capital expenditure guidance of approximately $525 million for 2016 but does not provide a clear full-year sales or earnings forecast.
- Management expects liquidity to be sufficient for ordinary-course obligations, working capital, capital expenditures, restructuring, debt service, dividends and planned share repurchases, based on cash on hand, operating cash flow and available revolver capacity.
- Lear expects a pretax, non-cash pension settlement charge of approximately $40 million to $55 million in the fourth quarter of 2016 from a limited lump-sum payout offer to certain terminated vested U.S. pension participants.
- Key operating risks include global vehicle production levels, customer concentration and vehicle-platform success, customer price reductions, supplier disruptions, labor issues, restructuring execution, raw-material and commodity costs, foreign exchange, cybersecurity, joint-venture performance, warranty and recall exposure, legal and environmental matters, and access to capital.
- Recorded reserves at October 1, 2016 included $15.1 million for pending legal disputes, $48.3 million for product liability and warranty claims, and $9.1 million for environmental matters. Management stated that ultimate outcomes remain uncertain.
- Foreign-exchange derivative contracts had aggregate notional value of approximately $2.0 billion and a net fair-value liability of $64.5 million. Lear does not hedge translation exposure from converting foreign operating results into U.S. dollars.
- Adoption of ASU 2016-09 on January 1, 2017 was expected to increase retained earnings by approximately $49.3 million through elimination of certain share-based-payment tax benefit balances. The filing states that the effects of other pending standards were still being evaluated or were not expected to be significant.
- The company reported effective disclosure controls and no material changes in internal control over financial reporting. It also reported no material changes to previously disclosed risk factors.
Important Facts for Investors to Verify
- Confirm the sustainability of margin expansion after adjusting for restructuring benefits, foreign exchange, customer pricing and the $30.3 million Beijing BAI consolidation gain.
- Assess whether the planned additional restructuring spending of approximately $50 million will generate the expected operating improvements.
- Evaluate the effect of the anticipated $40 million to $55 million pension settlement charge on fourth-quarter earnings and pension funded status.
- Monitor cash deployment among capital expenditures, dividends, share repurchases, debt reduction and potential acquisitions.
- Review exposure to vehicle production trends, customer and platform concentration, commodity costs, foreign exchange and pricing pressure.
- Reconcile reported debt, available revolver capacity and covenant compliance with future cash needs and the company’s investment-grade balance-sheet objectives.
- Verify the status and potential financial impact of product liability, warranty, recall, legal and environmental claims.