LEAR CORP quarterly report, Q2 FY2013

Lear Corporation — Form 10-Q Summary

Business context and reporting period

Lear Corporation is a global Tier 1 automotive supplier of seating systems and electrical power management systems. The filing covers the thirteen-week quarter and six months ended June 29, 2013, compared with periods ended June 30, 2012. Results are unaudited and are not necessarily indicative of full-year performance.

Global vehicle production increased 1% year over year in the first half of 2013 to 41.3 million units.
North American production increased 4%, while European production declined 3%. Europe and North America represented approximately 39% and 38% of first-half sales, respectively.

Financial performance and key metrics

Metric	Q2 2013	Q2 2012	Six months 2013	Six months 2012
Net sales	$4,113.1 million	$3,665.0 million	$8,060.2 million	$7,309.0 million
Gross profit	$337.7 million	$314.6 million	$650.1 million	$624.4 million
Gross margin	8.2%	8.6%	8.1%	8.5%
Net income attributable to Lear	$137.3 million	$145.4 million	$245.8 million	$279.5 million
Diluted earnings per share	$1.60	$1.45	$2.71	$2.76
Cash flow from operations	Not separately provided	Not separately provided	$265.4 million	$159.8 million

Q2 sales increased 12.2%; first-half sales increased 10.3%.
Seating represented 74.2% of first-half sales and generated first-half segment earnings of $307.9 million, or a 5.1% margin, compared with 6.6% in 2012.
EPMS represented 25.8% of first-half sales and generated first-half segment earnings of $183.9 million, or an 8.8% margin, compared with 6.5% in 2012.
Q2 selling, general and administrative expense was $127.9 million, or 3.1% of sales; first-half expense was $257.5 million, or 3.2% of sales.
Effective tax rates were 23.7% in Q2 and 24.7% for the first six months, compared with 19.2% and 20.9%, respectively, in the prior-year periods.

Liquidity, cash flow and capitalization

Cash and cash equivalents were $841.1 million at June 29, 2013, down from $1,402.2 million at December 31, 2012.
Operating cash flow was $265.4 million; capital expenditures were $226.4 million. Management estimated full-year 2013 capital spending at approximately $450 million.
Investing cash outflow was $178.7 million, compared with $421.9 million in the prior-year period, which included the $243.9 million Guilford Mills acquisition.
Financing cash outflow was $639.3 million, principally reflecting $1.0 billion of share repurchases, dividends, debt issuance costs and partial debt redemptions.
Long-term debt was $1,056.9 million, compared with $626.3 million at year-end 2012. Debt consisted of senior unsecured notes due 2018, 2020 and 2023.
Lear issued $500 million of 4.75% senior notes due 2023 and redeemed $70 million of principal of its 2018 and 2020 notes. It recognized an approximately $3.6 million loss on the partial debt extinguishment.
The amended revolving credit facility provides $1.0 billion of capacity and matures January 30, 2018. No borrowings were outstanding at June 29, 2013.
Lear reported compliance with all debt and revolving-credit covenants.

Material changes versus the prior comparable period

Revenue growth was driven by new business, higher production volumes on key platforms and the Guilford Mills acquisition, partially offset by foreign exchange movements.
Gross margin declined from 8.6% to 8.2% in Q2 and from 8.5% to 8.1% for the first half. Selling-price reductions and platform changeovers more than offset volume growth and operating improvements.
Net income declined despite higher sales, primarily reflecting lower equity income from affiliates, higher taxes, restructuring costs and the absence of the prior-year affiliate valuation-allowance benefit.
Diluted EPS increased in Q2 because of the significantly lower share count following repurchases, but declined for the first half.
Seating profitability weakened, while EPMS sales and margins improved materially.
First-half restructuring costs were $31.2 million, plus approximately $3 million of related manufacturing inefficiency charges. The company expects approximately $26 million of additional restructuring costs for actions initiated as of June 29, 2013.
Lear sold its 22.88% interest in International Automotive Components Group North America for net proceeds of $49.6 million, with no significant gain or loss.
The company paid $800 million under an accelerated stock repurchase agreement in Q2 and received an initial delivery of 11.9 million shares. The ASR is expected to be completed no later than March 2014, after which $750 million of repurchase authorization will remain.

Guidance, outlook, risks and unusual items

Management expects approximately $450 million of 2013 capital expenditures and pension contributions of $20 million to $25 million, plus approximately $15 million of defined-contribution plan contributions.
Management expects to continue quarterly dividends and share repurchases, subject to financial condition, capital requirements, market conditions and debt-covenant limitations.
Key operating risks include vehicle production volumes, customer platform changes, customer-imposed price reductions, customer and supplier financial condition, raw-material and commodity costs, foreign exchange, labor disruptions, product launches, restructuring execution and international operations.
Recorded reserves included $18.4 million for legal disputes, $30.0 million for product liability and warranty matters, and $5.0 million for environmental matters.
Automotive wire-harness antitrust litigation remains unresolved. The company’s motion to dismiss was denied in June 2013, and the potential loss cannot reasonably be estimated.
The company recognized first-half tax benefits of $20.3 million, principally from reversal of a foreign subsidiary valuation allowance and reinstatement of the U.S. research and development tax credit.
Q2 and first-half results included restructuring and manufacturing inefficiency costs, labor-related litigation claims, insurance-related losses, proxy-contest costs, and other items identified by management as unusual or nonrecurring.
Foreign exchange contracts had $939 million of notional exposure and approximately $8 million of fair value at June 29, 2013. Management estimated a hypothetical 10% strengthening of the U.S. dollar would have an approximately $27 million adverse annual earnings impact on net transactional exposures.

Important facts for investors to verify

Whether seating margins recover after platform changeovers, pricing pressure and restructuring activities.
The timing, cash cost and expected benefits of the remaining approximately $26 million of restructuring actions.
The final share count and settlement economics of the $800 million ASR, and the pace of the remaining $750 million authorization.
Whether cash generation remains sufficient to fund capital expenditures, debt service, dividends and repurchases while maintaining liquidity.
The impact of higher debt and interest expense following the 2023 notes issuance.
Developments and potential exposure from the wire-harness antitrust litigation, product liability, warranty, recall and environmental matters.
The sustainability of tax benefits and the effect of valuation allowances and jurisdictional earnings mix on future tax rates.
Exposure to vehicle production declines, European weakness, customer concentration, commodity costs and foreign currency movements.