Lear Corporation: Q1 2019 Form 10-Q Summary
Business context and reporting period
Lear Corporation is a global Tier 1 automotive supplier providing seating, electrical distribution systems, electronic modules, electrification, connectivity products and related software to major vehicle manufacturers. The filing covers the unaudited 13-week quarter ended March 30, 2019, compared with the quarter ended March 31, 2018.
Global light-vehicle production declined approximately 7% year over year, with decreases in North America, Europe and Africa, Asia, and South America. Lear generated 42% of sales in Europe and Africa, 36% in North America, 19% in Asia and 3% in South America.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $5,160.1 million | $5,733.7 million | Down 10% |
| Gross profit / margin | $473.2 million / 9.2% | $631.4 million / 11.0% | Margin down 180 bps |
| Income before tax and affiliate income | $286.9 million | $447.8 million | Down 36% |
| Net income attributable to Lear | $228.9 million | $353.7 million | Down 35% |
| Diluted EPS | $3.73 | $5.16 | Down 28% |
| Effective tax rate | 15.0% | 17.4% | Down 240 bps |
| Operating cash flow | $51.6 million | $236.8 million | Down $185.2 million |
| Capital expenditures | $122.8 million | $162.8 million | Down $40.0 million |
Seating sales were $3,913.7 million, down 10%, with segment earnings of $252.3 million and a 6.4% margin versus 7.8% in the prior year. E-Systems sales were $1,246.4 million, down 11%, with segment earnings of $128.3 million and a 10.3% margin versus 13.6%.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $1,199.4 million at March 30, 2019, compared with $1,493.2 million at December 31, 2018.
- Total debt, including short-term borrowings and the current portion of long-term debt, was approximately $1.97 billion. The company had no borrowings under its $1.75 billion revolving credit facility and approximately $240.6 million outstanding under its term loan facility.
- The revolving credit facility maturity was extended by one year to August 8, 2023; the term loan matures August 8, 2022. Lear was in compliance with its debt covenants.
- Cash, cash equivalents and restricted cash declined $298.9 million during the quarter to $1,220.9 million. Financing uses included $122.2 million for share repurchases, $49.5 million of dividends to Lear stockholders and $31.3 million of dividends to noncontrolling interests.
- The board increased the share-repurchase authorization to $1.5 billion and extended it through December 31, 2021. Lear repurchased 804,270 shares for $117.9 million during the quarter, with $1,465.2 million remaining under the authorization.
- The quarterly dividend increased 7% to $0.75 per share.
Material changes versus the prior comparable period
- Sales decreased $573.6 million, primarily from lower production volumes on key platforms and unfavorable foreign exchange, partially offset by new business in Asia and Europe.
- Gross margin declined from 11.0% to 9.2%, reflecting lower volumes, foreign exchange, customer price reductions and higher restructuring costs, partly offset by improved operating performance.
- Restructuring costs increased to $54.3 million from the prior-year level; including manufacturing inefficiencies, total restructuring-related costs were approximately $56 million versus $24 million in Q1 2018.
- Operating cash flow fell sharply because of lower earnings and a larger working-capital use, particularly a $592.7 million increase in accounts receivable.
- Other expense was $4.4 million versus other income of $5.6 million in the prior year. Q1 2018 included a $10 million gain from gaining control of an affiliate.
- Tax results included $37.2 million of net discrete tax benefits in Q1 2019, including $18.4 million related to changes in the tax status of certain affiliates. Q1 2018 included a $35.1 million valuation-allowance reversal and other offsetting tax items.
Guidance, outlook, risks and unusual items
- Management estimated 2019 capital spending at approximately $700 million.
- Lear expected to incur approximately $51 million of additional restructuring costs related to actions initiated by March 30, 2019. Future actions depend on market conditions, customer actions and other factors.
- Management believed cash on hand, operating cash flow and the available revolving facility were sufficient for ordinary-course liquidity needs, while noting sensitivity to automotive production, customer and supplier financial condition, restructuring cash costs and economic conditions.
- Key risks include vehicle production declines, loss or underperformance of vehicle platforms, customer price reductions, raw-material and commodity inflation, supplier disruptions, foreign exchange, tariffs and trade policy, labor issues, cybersecurity, warranty and recall exposure, legal and environmental matters, and limitations from indebtedness.
- Legal, product liability and environmental reserves were approximately $13.3 million, $27.7 million and $9.0 million, respectively. The filing states that ultimate outcomes remain uncertain.
- Effective January 1, 2019, Lear adopted the new lease standard, recognizing right-of-use assets of $438.1 million and lease obligations of $445.8 million. The adoption did not materially affect operating results or cash flows.
- On April 17, 2019, after quarter-end, Lear acquired Xevo Inc. for approximately $320 million on a cash- and debt-free basis. Xevo provides automotive software for cloud, car and mobile applications and will be reported within E-Systems.
Investor verification points
- Verify whether vehicle production declines and foreign-exchange effects continue to pressure sales and segment margins.
- Monitor restructuring execution, the remaining approximately $51 million of expected restructuring costs and related cash requirements.
- Assess working-capital conversion and whether operating cash flow improves from the unusually large accounts-receivable use.
- Evaluate the effect of the Xevo acquisition, including purchase accounting, integration costs and contribution to E-Systems growth.
- Review the sustainability of share repurchases and the $0.75 quarterly dividend relative to cash generation, capital expenditures and debt obligations.
- Track customer pricing, commodity costs, supply-chain conditions, foreign exchange and potential product liability, warranty, recall and environmental claims.