Lear Corporation: 2018 Second-Quarter Form 10-Q Summary
Business Context and Reporting Period
Lear designs and manufactures automotive seating, electrical distribution systems, electronic modules, software and related components for global automotive original equipment manufacturers. The filing covers the quarter and six months ended June 30, 2018, compared with July 1, 2017. Reportable segments are Seating and E-Systems.
Key Financial Metrics
| Metric | Q2 2018 | Q2 2017 | Six Months 2018 | Six Months 2017 |
|---|---|---|---|---|
| Net sales | $5,580.8 million | $5,123.2 million | $11,314.5 million | $10,121.7 million |
| Gross profit | $638.1 million | $577.8 million | $1,269.5 million | $1,160.3 million |
| Gross margin | 11.4% | 11.3% | 11.2% | 11.5% |
| Net income attributable to Lear | $331.4 million | $311.9 million | $685.1 million | $617.7 million |
| Diluted EPS | $4.83 | $4.49 | $9.99 | $8.84 |
| Effective tax rate | 22.0% | 19.2% | 19.7% | 21.0% |
Q2 segment sales were $4,274.7 million for Seating and $1,306.1 million for E-Systems. Segment margins were 8.1% and 13.4%, respectively. Six-month segment margins were 8.0% for Seating and 13.5% for E-Systems.
Six-month operating cash flow was $753.7 million, compared with $845.3 million in the prior-year period. Capital expenditures were $332.2 million versus $274.0 million, and management estimated full-year 2018 capital spending of approximately $660 million. Cash used in financing activities was $507.1 million, including $284.7 million of share repurchases, $96.7 million of dividends to Lear stockholders and $64.3 million of dividends to noncontrolling interests.
At June 30, 2018, cash and cash equivalents were $1,327.9 million, or $1,366.8 million including restricted cash. Total debt was approximately $1,970.3 million excluding the effects of debt issuance costs and original issue discount. The company had $1.75 billion of available capacity under its revolving credit facility, no revolving borrowings, and $245.3 million outstanding under its term loan. Lear reported compliance with debt covenants.
Material Changes Versus the Prior Comparable Period
- Q2 sales increased 9%, and six-month sales increased 12%, driven by new business, favorable foreign exchange, the Antolin Seating acquisition and consolidation of affiliates. These benefits were partly offset by lower production volumes on key platforms.
- Q2 net income attributable to Lear increased 6%, while diluted EPS increased 8%, helped by lower average shares outstanding following repurchases.
- Six-month gross margin declined to 11.2% from 11.5%, reflecting selling-price reductions and lower platform volumes despite favorable operating performance, restructuring benefits and acquisition-related contributions.
- E-Systems sales grew faster than Seating sales, but E-Systems margins declined to 13.5% for the first six months from 14.4%, primarily reflecting selling-price reductions and lower production volumes.
- Operating cash flow decreased $91 million because higher earnings and depreciation were more than offset by a $190.2 million working-capital use, compared with a $20.0 million source in the prior-year period.
- Lear repurchased $295.7 million of common stock during the first half and had $1,209.4 million remaining under its authorization. Quarterly dividends increased 40% to $0.70 per share.
Outlook, Commentary, Risks and Unusual Items
Management identified global vehicle production, vehicle-platform mix, customer pricing, product launches, cost reductions, restructuring and increasing electrical and electronic content as major performance drivers. Global light-vehicle production increased approximately 2% in the first half of 2018, but North American production declined 3%.
- Lear recorded $28.4 million of restructuring charges and approximately $9 million of related manufacturing inefficiency costs in the first half. Approximately $24 million of additional restructuring costs were expected for actions initiated through June 30, 2018.
- The company recognized a $10.0 million gain from obtaining control of Lear FAWSN, an affiliate with approximately $100 million of annual sales. Lear also acquired EXO Technologies, a GPS technology company focused on autonomous and connected vehicles.
- Reported results included favorable litigation settlements of approximately $17 million in the first half, as well as significant tax items, including a $35.1 million benefit from reversing foreign deferred-tax-asset valuation allowances and a $22.0 million expense related to foreign withholding tax on undistributed earnings.
- Lear adopted ASC 606 revenue recognition and several other accounting standards in 2018; management stated that adoption effects were not significant. The company expected the January 1, 2019 lease standard to have a significant balance-sheet impact.
- Principal risks include changes in vehicle production and model success, customer and supplier financial condition, customer-imposed price reductions, raw-material and commodity costs, foreign exchange, tariffs and trade policies, restructuring execution, product liability and recalls, legal and environmental claims, cybersecurity, joint ventures and access to capital.
Most Important Facts for Investors to Verify
- Whether the expected restructuring costs and manufacturing inefficiencies are completed within management’s estimates and deliver the anticipated savings.
- Whether E-Systems margin pressure from pricing and lower platform volumes persists.
- Whether working-capital investment normalizes and operating cash flow supports capital expenditures, dividends and repurchases.
- Whether vehicle production, customer mix, foreign exchange and acquisition-related contributions sustain sales growth.
- The final accounting impact of the Tax Cuts and Jobs Act and the implementation impact of the new lease standard.
- Potential changes in warranty, recall, product-liability, environmental and commercial-dispute exposures.
- The pace and valuation of future share repurchases relative to debt, liquidity and other capital needs.