Lear Corporation Form 10-Q Summary
Business Context and Reporting Period
Lear Corporation designs and manufactures automotive seating, electrical distribution systems, electronic modules, software and related components for major global automotive manufacturers. The filing covers the unaudited thirteen-week quarter ended March 31, 2018, compared with the quarter ended April 1, 2017.
Lear reported two operating segments: Seating and E-Systems. Global light vehicle production declined approximately 1% year over year to 23.8 million units, while Lear benefited from new business, foreign exchange and the April 2017 acquisition of Grupo Antolin’s automotive seating business.
Financial Performance and Key Metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net sales | $5,733.7 million | $4,998.5 million | +15% |
| Gross profit | $631.4 million | $582.5 million | +8% |
| Gross margin | 11.0% | 11.7% | Down 70 basis points |
| Income before taxes and equity income | $447.8 million | $392.2 million | +14% |
| Effective tax rate | 17.4% | 22.7% | Down 530 basis points |
| Net income attributable to Lear | $353.7 million | $305.8 million | +16% |
| Diluted EPS | $5.16 | $4.35 | +19% |
| Operating cash flow | $236.8 million | $278.9 million | Down $42.1 million |
| Capital expenditures | $162.8 million | $120.8 million | +35% |
Approximate cash flow after capital expenditures was $74 million in Q1 2018, compared with approximately $158 million in Q1 2017. Working capital used $252.6 million of cash, primarily because of higher accounts receivable supporting increased sales.
Seating sales increased 12% to $4,329.9 million, while segment earnings increased to $339.5 million; its margin declined to 7.8% from 8.3%. E-Systems sales increased 24% to $1,403.8 million, while segment earnings increased to $190.8 million; its margin declined to 13.6% from 14.6%.
Balance Sheet, Debt and Liquidity
- Cash and cash equivalents were $1,268.5 million at March 31, 2018, or $1,294.5 million including restricted cash, compared with $1,500.4 million at December 31, 2017.
- Total debt was approximately $1,962 million, including $1,950.0 million of long-term debt, $9.1 million of current long-term debt and $2.9 million of short-term borrowings.
- The company had no borrowings under its $1.75 billion revolving credit facility and $246.9 million outstanding under its $250 million term loan facility.
- Management reported approximately $1.75 billion of available revolving borrowing capacity and stated that liquidity sources were adequate for ordinary-course obligations, dividends and authorized share repurchases.
- Lear was in compliance with all debt covenants as of March 31, 2018.
Material Changes Versus the Prior Comparable Period
- Sales increased $735 million, driven by $349 million of foreign exchange benefit, $308 million of new business and $161 million from Antolin Seating; lower production volumes on key platforms reduced sales by $203 million.
- Gross margin contracted despite higher gross profit, reflecting selling-price reductions and lower production volumes, partly offset by favorable operating performance and restructuring benefits.
- Net income and diluted EPS benefited from higher sales, operating performance, lower taxes and a reduction in average diluted shares outstanding from 70.3 million to 67.6 million.
- Cash generation weakened because of working-capital investment and higher capital expenditures.
- Lear repurchased 829,360 shares for an aggregate $155.4 million and paid $50.7 million of dividends to Lear stockholders. The quarterly dividend increased 40% to $0.70 per share.
- The company obtained control of Lear FAWSN in January 2018, consolidating the affiliate in E-Systems and recognizing a $10.0 million gain on remeasurement of its previously held interest.
- Lear acquired EXO Technologies in January 2018 to expand high-accuracy GPS capabilities for connected and autonomous vehicles; the filing does not provide the purchase price.
Guidance, Outlook, Risks and Unusual Items
- Management estimated 2018 capital expenditures of approximately $660 million.
- Lear recorded $18.4 million of restructuring costs and approximately $6 million of related manufacturing inefficiency costs in Q1 2018. It expects approximately $30 million of additional restructuring costs related to actions initiated as of March 31, 2018.
- The effective tax rate benefited from the U.S. Tax Cuts and Jobs Act, a $35.1 million reversal of valuation allowances at a foreign subsidiary, $10.1 million of share-based compensation benefits and other items. These benefits were partly offset by $22.0 million of foreign withholding tax expense. The company had not finalized all tax accounting related to the Act.
- Key risks include vehicle production volatility, customer price reductions, loss or underperformance of vehicle platforms, customer and supplier financial distress, restructuring execution, labor disruptions, raw-material and commodity costs, foreign exchange, tariffs and trade policy, cybersecurity, warranty and recall claims, legal and environmental matters, joint ventures, pensions and tax changes.
- Recorded reserves included $25.6 million for legal disputes, $40.9 million for product liability and warranty claims, and $8.9 million for environmental matters. Management stated that outcomes remain uncertain and actual results could differ materially from reserves.
- Foreign currency derivative contracts had a total notional amount of $2.64 billion and a net fair value asset of $31.1 million at March 31, 2018.
Important Facts for Investors to Verify
- Whether sales growth and segment earnings can be sustained after separating foreign exchange, Antolin, affiliate consolidation and other acquisition effects.
- Whether Seating and E-Systems margins recover from the year-over-year declines.
- Whether working-capital requirements and the planned $660 million capital program constrain free cash flow.
- The timing and ultimate cost of the remaining restructuring program, including the estimated additional $30 million.
- The durability of Q1 tax benefits and the finalized impact of the Tax Cuts and Jobs Act, including GILTI, FDII and BEAT provisions.
- Progress integrating Antolin Seating and EXO Technologies, and the effect of the Lear FAWSN consolidation.
- Exposure to vehicle production declines, customer price reductions, commodity inflation, foreign exchange movements, recalls and legal contingencies.