Lear Corporation Form 10-Q Summary
Business context and reporting period
Lear Corporation is a global Tier 1 automotive supplier producing complete seating systems, related components, electrical distribution systems, and electrical power management systems. The filing covers the thirteen-week quarter ended March 30, 2013; comparable prior-period data is for the quarter ended March 31, 2012. Results are unaudited and are not necessarily indicative of full-year performance.
Global vehicle production declined 1% year over year to 20.4 million units. North American production increased 1% to 4.0 million units, while European production declined 8% to 4.9 million units. Europe and Africa represented approximately 39% of sales and North America approximately 38%.
Financial performance and liquidity
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $3,947.1 million | $3,644.0 million | Up 8.3% |
| Gross profit | $312.4 million | $309.8 million | Up $2.6 million |
| Gross margin | 7.9% | 8.5% | Down 60 basis points |
| Income before taxes and equity income | $146.8 million | $174.0 million | Down 15.6% |
| Consolidated net income | $116.9 million | $144.4 million | Down 19.0% |
| Net income attributable to Lear | $108.5 million | $134.1 million | Down 19.1% |
| Diluted earnings per share | $1.13 | $1.32 | Down $0.19 |
| Net cash from operating activities | $63.8 million | $4.2 million | Up $59.6 million |
| Capital expenditures | $98.7 million | $70.3 million | Up $28.4 million |
Operating cash flow benefited from $105.4 million of collections related to customer engineering and tooling costs and was partly offset by a $159.6 million use of working capital. Investing cash flow was negative $40.3 million and included $49.6 million of proceeds from the sale of Lear’s 22.88% interest in International Automotive Components Group North America.
At March 30, 2013, cash and cash equivalents were $1,601.3 million, including approximately $936 million held by foreign subsidiaries. Total assets were $8,824.2 million and equity was $3,485.8 million. Long-term debt was $1,056.8 million, compared with $626.3 million at December 31, 2012. Lear had no short-term debt and no borrowings under its $1.0 billion revolving credit facility.
The company issued $500 million of 4.75% senior notes due 2023, redeemed $72.1 million of senior notes due 2018 and 2020, and paid $13.4 million of financing costs. Management stated that the company was in compliance with all debt and revolving-credit covenants.
Material changes versus the prior comparable period
- Sales increased $303.1 million, primarily from $144 million of new business, $93 million from improved production volumes on key platforms, and $86 million from the Guilford acquisition; foreign exchange reduced sales by $29 million.
- Seating sales increased 3.5% to $2,911.7 million, but segment earnings fell to $141.4 million from $185.8 million and margin declined to 4.9% from 6.6%.
- EPMS sales increased 24.7% to $1,035.4 million, while segment earnings increased to $89.0 million from $52.6 million and margin improved to 8.6% from 6.3%.
- Gross margin declined because of the Guilford acquisition, restructuring costs, product price reductions, and launch costs, partly offset by operating improvements and restructuring benefits.
- SG&A increased to $129.6 million from $116.1 million, and amortization increased to $8.6 million from $6.9 million, primarily reflecting the Guilford acquisition and higher restructuring costs.
- Interest expense increased to $16.7 million from $12.5 million following the 2023 notes issuance. Other expense increased to $10.7 million from $0.3 million, including a $3.6 million debt-extinguishment loss and unfavorable foreign exchange effects.
- Average diluted shares declined to 95.9 million from 101.9 million because of share repurchases, partially offsetting the earnings decline on a per-share basis.
- Operating cash flow improved materially from $4.2 million to $63.8 million, while capital spending increased from $70.3 million to $98.7 million.
Guidance, outlook, commentary, risks, and unusual items
- Management estimated 2013 capital spending of approximately $450 million and expected pension contributions of $20 million to $25 million, plus approximately $15 million of defined-contribution program contributions.
- The company incurred $17.0 million of restructuring charges and approximately $1 million of related manufacturing inefficiency costs in the quarter. Approximately $34 million of additional restructuring costs were expected for actions initiated through March 30, 2013.
- In April 2013, Lear entered into an $800 million accelerated stock repurchase agreement, funded with cash on hand. The company expected an initial delivery of 11.9 million shares in the second quarter, with final shares based on the applicable volume-weighted average price. Approximately $750 million of authorization was expected to remain after completion.
- The quarterly dividend increased to $0.17 per share from $0.14 per share in the prior-year quarter. Future dividends remain subject to board approval, financial performance, capital requirements, debt restrictions, and other factors.
- Q1 2013 included approximately $3 million of proxy contest costs, $4 million of debt-extinguishment loss, $6 million of net losses and incremental costs related to the 2011 European facility fire, and $6 million of tax benefits primarily from reinstatement of the U.S. research and development tax credit.
- Key risks include global vehicle production and model mix, customer price reductions, customer and supplier financial condition, restructuring execution, raw material and commodity costs, foreign exchange, labor and supply disruptions, product liability and recalls, environmental matters, legal proceedings, pension assumptions, debt restrictions, and access to capital markets.
- Pending automotive wire-harness antitrust litigation seeks unspecified damages and other relief. The company believes the claims are without merit, but the ultimate outcome and potential loss could not reasonably be estimated.
- Recorded reserves at March 30, 2013 included approximately $12.8 million for legal disputes, $30.4 million for product liability and warranty claims, and $5.1 million for environmental matters.
- Management reported no material changes to previously disclosed risk factors, no material changes in internal control over financial reporting, and effective disclosure controls as of quarter-end.
Most important facts for an investor to verify
- Whether the lower gross and seating margins persist as European production remains weak and restructuring actions continue.
- The cash-flow impact of working-capital movements, customer tooling collections, and the planned approximately $450 million of 2013 capital spending.
- The effect of the $800 million accelerated stock repurchase and remaining buyback authorization on liquidity, leverage, and diluted share count.
- Debt-service capacity after the 2023 notes issuance, the 2018 and 2020 note redemption, and the increase in long-term debt.
- Progress, timing, and total cost of restructuring actions, including the estimated $34 million of additional costs.
- Developments in the automotive wire-harness antitrust litigation and product liability, warranty, environmental, and recall exposures.
- Actual vehicle production volumes, customer pricing actions, launch costs, commodity prices, and foreign-exchange movements relative to management assumptions.