Lear Corporation Form 10-Q Summary
Reporting period: Quarterly period ended September 27, 2014; interim results are unaudited and reported on a 13-week quarterly calendar. Lear designs and manufactures automotive seating, electrical distribution systems, and related components for global automotive original equipment manufacturers.
Financial performance and position
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Net sales | $4,232.7 million | $3,917.7 million | $13,177.6 million | $11,977.9 million |
| Gross profit / margin | $361.2 million / 8.5% | $330.2 million / 8.4% | $1,100.8 million / 8.4% | $980.3 million / 8.2% |
| Income before taxes | $197.7 million | $158.7 million | $568.4 million | $479.0 million |
| Net income attributable to Lear | $140.1 million | $112.8 million | $410.6 million | $358.6 million |
| Diluted EPS | $1.72 | $1.38 | $5.01 | $4.09 |
| Operating cash flow | Not separately provided | Not separately provided | $411.7 million | $429.6 million |
- Q3 sales increased 8%; nine-month sales increased 10%. Management attributed growth primarily to new business and higher production volumes on key Lear platforms.
- Q3 diluted EPS increased 25%, while nine-month diluted EPS increased 22%, aided by higher earnings and fewer average shares outstanding.
- Q3 gross margin improved to 8.5% from 8.4%; nine-month gross margin improved to 8.4% from 8.2%. Favorable operating performance and restructuring benefits were partly offset by customer price reductions.
- Q3 segment earnings were $224.5 million, or approximately 5.3% of sales, versus $193.0 million, or approximately 4.9%, in the prior-year quarter. Electrical margin improved to 13.1% from 10.9%; seating margin was 4.9% in both periods.
- Cash flow from operations declined despite higher earnings because working capital consumed $321.7 million versus $157.7 million in the prior-year period. Accounts receivable increased $652.7 million and inventories increased $111.9 million during the nine months.
- Capital expenditures were $280.8 million, and management estimated full-year 2014 capital spending of approximately $450 million.
- Cash and cash equivalents were $872.7 million at September 27, 2014, compared with $1,137.7 million at December 31, 2013. Approximately $580 million was held in foreign subsidiaries and was generally repatriable without additional income tax expense.
- Total assets were $8.691 billion, total equity was $3.156 billion, and long-term debt was $1.069 billion at quarter-end. There were no borrowings under the $1.0 billion revolving credit facility and no short-term debt balances.
- The company paid $259.4 million for share repurchases during the first nine months and declared quarterly dividends of $0.20 per share. Remaining repurchase authorization was $490.6 million as of the report date.
Material changes versus the prior comparable period
- Sales benefited from $787 million of new business and $411 million from improved production volumes during the first nine months. These benefits were partly offset by $232 million from customer selling-price reductions and seating-platform changeovers.
- Restructuring charges increased to $86.6 million in the first nine months, compared with lower charges in the prior period; including manufacturing inefficiencies, reported restructuring-related costs were approximately $91 million versus $47 million.
- Electrical segment earnings increased to $413.3 million from $295.5 million, and margin expanded to 12.4% from 9.5%. Seating earnings increased to $471.3 million from $450.7 million, but margin declined to 4.8% from 5.1% because of platform changeovers, price reductions, and higher restructuring costs.
- Lear issued $325 million of 5.375% senior notes due 2024 and used the proceeds and cash on hand to redeem the remaining 2018 notes and part of the 2020 notes. The company recorded an $17.5 million debt-extinguishment loss.
- Foreign currency translation reduced comprehensive income by $98.9 million in the first nine months, primarily because of the weakening euro against the U.S. dollar.
- The company repurchased substantially less stock than in the prior-year period: $259.4 million versus $1.000 billion.
Outlook, unusual items, risks, and contingencies
- Lear agreed to acquire Eagle Ottawa, a privately held automotive leather supplier, for approximately $850 million on a cash-free and debt-free basis. Closing was expected in the first quarter of 2015, subject to customary conditions and regulatory approval. Management expected to fund the acquisition with cash and debt.
- The company recorded $86.6 million of restructuring charges through September 27, 2014 and expected approximately $34 million of additional costs related to actions initiated by that date.
- Management identified global vehicle production, customer platform performance, customer-imposed price reductions, supplier stability, raw material and commodity costs, foreign exchange, labor issues, warranty and recall claims, legal proceedings, cybersecurity, environmental compliance, and access to capital as material risks.
- A hypothetical 10% strengthening of the U.S. dollar against exposed currencies was estimated to produce an adverse annual earnings impact of approximately $31 million. Foreign exchange derivatives had $874 million of notional value and approximately $4 million of fair value at quarter-end.
- Legal reserves were $10.2 million, product liability and warranty reserves were $26.3 million, and environmental reserves were $4.8 million. A wire-harness antitrust settlement totaling $8.75 million remained subject to final court approval; the company’s direct cash contribution was approximately $0.4 million.
- The company stated that no material changes had occurred to previously disclosed risk factors. It also stated that disclosure controls were effective and that there were no material changes in internal control over financial reporting.
- Tax expense was affected by jurisdictional earnings mix, valuation allowances, restructuring and debt-redemption items, and tax audit settlements. Management noted that a reduction in approximately $100 million of international valuation allowances could occur as early as the fourth quarter of 2014 if profitability continued, potentially materially affecting tax expense and net income.
Important facts for investors to verify
- Completion, financing, purchase accounting, and integration costs associated with the planned Eagle Ottawa acquisition.
- Execution of restructuring actions, the expected additional $34 million of restructuring costs, and their effect on seating margins.
- Working-capital trends, especially accounts receivable collections and inventory growth, given the decline in operating cash flow.
- Future customer price reductions, vehicle-platform changeovers, production volumes, and the sustainability of electrical-segment margin gains.
- Cash deployment among capital expenditures, dividends, share repurchases, debt repayment, and acquisition funding.
- Foreign exchange exposure, commodity costs, warranty and recall claims, and the ultimate outcomes of pending legal and environmental matters.
- Potential changes in international tax valuation allowances and the resulting impact on reported earnings.