Lear Corporation: Q1 2017 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 original equipment manufacturers. The filing covers the unaudited thirteen-week quarter ended April 1, 2017, compared with the quarter ended April 2, 2016.
Reportable segments were Seating and E-Systems. Global light-vehicle production increased approximately 6% year over year to 23.9 million units, with growth in North America, Europe and Africa, Asia, and South America.
Financial Performance and Position
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $4,998.5 million | $4,662.9 million | Up 7% |
| Gross profit | $582.5 million | $535.7 million | Up 9% |
| Gross margin | 11.7% | 11.5% | Up 20 bps |
| Net income attributable to Lear | $305.8 million | $248.4 million | Up 23% |
| Diluted earnings per share | $4.35 | $3.29 | Up 32% |
| Operating cash flow | $278.9 million | $288.6 million | Down $9.7 million |
| Capital expenditures | $120.8 million | $88.1 million | Up 37% |
Net income attributable to Lear represented a 6.1% net margin, compared with 5.3% in the prior-year quarter. Pretax income before taxes and equity income was $392.2 million, versus $343.9 million; the effective tax rate declined to 22.7% from 28.6%.
- Seating: Sales of $3,868.0 million, up 7%; segment earnings of $320.3 million; margin of 8.3% versus 8.1%.
- E-Systems: Sales of $1,130.5 million, up 7%; segment earnings of $164.9 million; margin of 14.6% versus 14.1%.
- Cash and liquidity: Cash and equivalents were $1,209.7 million at April 1, 2017, compared with $1,271.6 million at year-end 2016. The company reported $1.25 billion of available capacity under its revolving credit facility.
- Debt: Carrying value of long-term debt was $1,927.8 million, including the current portion, plus $10.2 million of short-term borrowings. Approximate gross debt was $1.94 billion and approximate debt less cash was $0.73 billion.
- Equity returns: Lear repurchased $127.5 million of common stock and declared a $0.50 quarterly dividend per share, compared with $0.30 in Q1 2016.
Material Changes Versus the Prior Comparable Period
- Sales growth reflected $263 million of new business, primarily in Europe and Asia, and $107 million from higher production volumes on key platforms.
- Gross profit benefited from new business, higher volumes, favorable operating performance and restructuring actions. These benefits were partly offset by customer price reductions and foreign-exchange effects.
- Operating cash flow declined despite higher earnings, primarily because working capital consumed $145.3 million, compared with $77.5 million in the prior-year quarter. Accounts receivable increased by $526.6 million.
- Capital spending increased to $120.8 million. Management estimated full-year 2017 capital spending at approximately $550 million.
- Interest expense was broadly unchanged, while other expense declined to $3.7 million from $8.5 million, aided by improved foreign-exchange results.
- Average diluted shares declined to 70.3 million from 75.5 million, benefiting diluted EPS in addition to higher net income.
Guidance, Outlook, Commentary, Risks and Unusual Items
- The filing does not provide a clear full-year revenue or earnings guidance range. It estimates 2017 capital expenditures at approximately $550 million.
- Lear expects approximately $44 million of additional restructuring costs related to actions initiated as of April 1, 2017. First-quarter restructuring charges were $8.5 million, including $7.7 million in cost of sales and $0.8 million in SG&A.
- The company recognized $19.1 million of net tax benefits in Q1 2017, including $15.5 million associated with the accounting change for share-based compensation and $3.6 million related to restructuring and other items. This benefited the reported tax rate and earnings.
- Effective January 1, 2017, adoption of ASU 2016-09 produced a $54.5 million deferred tax asset and corresponding retained-earnings credit. The filing states that the reported tax benefit should be considered when assessing earnings quality.
- Lear acquired AccuMED in December 2016 for $148.5 million net of cash, adding approximately $80 million of annual sales and provisional goodwill of $72.9 million. The purchase-price allocation remained preliminary.
- Lear agreed to acquire Grupo Antolin’s automotive seating business for approximately €286 million, or approximately $305 million at the April 1, 2017 exchange rate. EU regulatory approval was received April 12, 2017, and closing was expected in Q2 2017 subject to customary conditions.
- Key risks include vehicle production levels, platform and customer concentration, customer-imposed price reductions, supplier and commodity costs, labor disruptions, product liability and recalls, restructuring execution, foreign exchange, cybersecurity, tax and trade policy, environmental matters, and the financial condition of customers and suppliers.
- Recorded reserves at April 1, 2017 included $8.7 million for legal disputes, $54.7 million for product liability and warranty claims, and $9.0 million for environmental matters. Actual outcomes could differ materially from current estimates.
- Lear was in compliance with the covenants governing its credit agreement and senior notes. The filing states that no material changes occurred in previously disclosed risk factors.
Important Facts for Investors to Verify
- Whether revenue and earnings growth persists after adjusting for higher global vehicle production, acquisitions, foreign exchange and the $19.1 million tax benefit.
- Whether working-capital consumption, particularly the $526.6 million increase in accounts receivable, normalizes and supports operating cash flow.
- The timing, purchase price funding and financial contribution of the Grupo Antolin transaction.
- Actual 2017 restructuring spending versus the estimated $44 million of remaining costs and the expected operational savings.
- Capital allocation priorities, including the $872.5 million remaining share-repurchase authorization, the increased dividend, capital expenditures and debt reduction.
- Exposure to customer price reductions, commodity inflation, vehicle-platform changes, recalls, warranty claims, foreign exchange and automotive production volatility.