Lear Corporation 10-Q Summary: First Quarter 2020
Business context and reporting period
Lear Corporation is a global Tier 1 automotive supplier of seating, electrical distribution systems, electronic modules, electrification products, connectivity products and related software. The filing covers the thirteen weeks ended April 4, 2020, compared with the thirteen weeks ended March 30, 2019. Results were materially affected by the COVID-19 pandemic and associated automotive production shutdowns worldwide.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $4,457.7 million | $5,160.1 million | Down 14% |
| Gross profit | $334.2 million | $473.2 million | Down 29% |
| Gross margin | 7.5% | 9.2% | Down 170 basis points |
| Income before taxes and equity earnings | $108.5 million | $286.9 million | Down 62% |
| Net income attributable to Lear | $76.4 million | $228.9 million | Down 67% |
| Diluted EPS | $1.26 | $3.73 | Down 66% |
| Net cash provided by operating activities | $222.3 million | $51.6 million | Up $170.7 million |
Seating revenue was $3,366.6 million, down 14%, with segment earnings of $186.1 million and a 5.5% margin versus 6.4% in the prior-year quarter. E-Systems revenue was $1,091.1 million, down 12%, with segment earnings of $32.4 million and a 3.0% margin versus 10.3%.
Cash and cash equivalents were $2,449.1 million at April 4, 2020, compared with $1,487.7 million at December 31, 2019. Cash, cash equivalents and restricted cash totaled $2,461.9 million. Capital expenditures were $109.1 million, compared with $122.8 million in the prior-year quarter.
Total debt consisted of approximately $1,000.0 million drawn on the revolving credit facility, $231.2 million under the term loan facility and $2,100.0 million of senior notes at maturity value. The company reported $750 million of remaining revolving-credit availability and compliance with its debt covenants.
Material changes versus the prior comparable period
- Global light vehicle production declined 23% to approximately 17.3 million units. Regional production declines were approximately 10% in North America, 19% in Europe and Africa, 30% in Asia and 16% in South America.
- Lower production volumes and foreign-exchange movements reduced sales by approximately $675 million and $108 million, respectively; new business partially offset the decline by approximately $130 million.
- Cost of sales fell to $4,123.5 million from $4,686.9 million, but declined less rapidly than revenue, reducing gross margin.
- Other expense increased to $40.5 million from $4.4 million, including $21.1 million of debt-extinguishment loss and $17.7 million of net foreign-currency transaction losses.
- Interest expense increased to $24.4 million from $20.9 million, primarily reflecting financing associated with the Xevo acquisition and subsequent debt activity.
- Operating cash flow improved primarily because accounts receivable decreased by $415.6 million, versus an increase of $592.7 million in the prior-year quarter; the filing attributes this partly to lower quarter-end sales and timing differences.
- Accumulated other comprehensive loss increased to $1,049.3 million from $772.7 million, largely due to foreign-currency translation and derivative-hedging losses.
Guidance, outlook, commentary and unusual items
- Management expected COVID-19 to have a material adverse impact on second-quarter 2020 sales, operating results and cash flows. Most facilities outside China were closed at quarter-end, with closures continuing through April and, in many cases, into May; reopened facilities were operating below capacity.
- The company provided no full-year revenue or earnings guidance in the filing. It estimated 2020 capital expenditures of $450 million to $500 million, reduced in response to the pandemic.
- Management temporarily suspended share repurchases and quarterly cash dividends in March 2020. Before suspension, Lear repurchased $70.0 million of stock, or 641,149 shares, at an average price of $109.22. The remaining authorization was $1.43 billion.
- Lear borrowed $1.0 billion under its $1.75 billion revolving credit facility as a precautionary liquidity measure. It also issued $650 million of new notes and used the proceeds to redeem the $650 million of 2025 notes, resulting in a $21.1 million extinguishment loss.
- First-quarter restructuring costs were $32.6 million, plus approximately $1 million of manufacturing inefficiency charges. Management expected approximately $46 million of additional restructuring costs related to actions initiated by April 4, 2020, all expected by year-end, and anticipated additional actions depending on market conditions.
- An interim goodwill impairment analysis for an E-Systems reporting unit found that fair value exceeded carrying value as of April 4, 2020. The reporting unit was considered at risk of a future impairment if the pandemic were more severe or recovery slower than expected.
- The company deferred U.S. pension contributions where permitted under the CARES Act and expected 2020 domestic and foreign pension contributions of $10 million to $20 million.
- Key contingencies include possible extended customer payment terms, lower vehicle demand, customer and supplier financial distress, supply-chain disruptions, renewed shutdowns, covenant pressure, foreign-exchange volatility, raw-material costs, recalls, warranty claims, litigation and environmental matters.
Important facts for investors to verify
- Actual duration and severity of COVID-19-related production shutdowns, plant utilization and the pace of automotive demand recovery.
- Whether the $750 million of remaining revolver availability and $2.45 billion of cash remain sufficient under prolonged negative operating cash flow.
- Compliance with maximum-leverage and other credit-agreement covenants as pandemic-related earnings and cash flows develop.
- Timing and amount of the approximately $46 million of identified additional restructuring costs and any further restructuring actions.
- Whether the E-Systems reporting unit or other assets require impairment charges under weaker-than-expected industry conditions.
- Potential changes to the suspended dividend and share-repurchase program.
- Recoverability of accounts receivable, inventories, deferred tax assets and customer-reimbursable engineering and tooling costs.
- Unresolved legal, product-liability, warranty and environmental exposures; recorded reserves at quarter-end included $14.1 million for legal disputes, $33.8 million for product liability and warranty claims, and $9.2 million for environmental matters.