Lear Corporation — Form 10-Q Summary
Business context and reporting period
Lear Corporation is a global Tier 1 automotive supplier serving major original equipment manufacturers through two reportable segments: Seating and Electrical Power Management Systems (EPMS). The filing covers the unaudited 13-week quarter and nine months ended September 28, 2013, compared with September 29, 2012. Global vehicle production increased 2% in the first nine months, while Europe declined 1% and North America increased 5%.
Financial performance and liquidity
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Net sales | $3,917.7 million | $3,538.6 million | $11,977.9 million | $10,847.6 million |
| Gross profit / margin | $330.2 million / 8.4% | $291.3 million / 8.2% | $980.3 million / 8.2% | $915.7 million / 8.4% |
| Net income attributable to Lear | $112.8 million | $121.4 million | $358.6 million | $400.9 million |
| Diluted EPS | $1.38 | $1.23 | $4.09 | $3.99 |
| Operating cash flow | Not separately provided | Not separately provided | $429.6 million | $360.7 million |
- Q3 sales increased 10.7%; nine-month sales increased 10.4%.
- Q3 net income declined 7.1%, while nine-month net income declined 10.5%. Lower earnings reflected higher taxes, other expense, restructuring costs and increased interest expense.
- Q3 diluted EPS increased despite lower net income because average diluted shares declined to 81.8 million from 98.9 million, primarily reflecting substantial share repurchases.
- Cash and cash equivalents were $884.0 million at September 28, 2013, down from $1,402.2 million at December 31, 2012. The company reported $1.0 billion of available capacity under its revolving credit facility and no borrowings outstanding.
- Capital expenditures were $329.2 million in the first nine months. Net cash used in investing activities was $281.4 million.
- Net cash used in financing activities was $673.5 million, including $1.0 billion of share repurchases, $44.8 million of dividends, $72.1 million of senior-note redemptions and $500.0 million of new senior notes issued.
- Long-term debt increased to $1,057.0 million from $626.3 million at year-end 2012. Debt consists of senior notes due 2018, 2020 and 2023. The company was in compliance with debt covenants.
- Current assets were $5,003.6 million versus current liabilities of $3,749.6 million. Accounts receivable increased to $2,596.9 million and inventories increased to $839.2 million.
Material changes versus the prior comparable period
- Seating sales increased 8.6% in Q3 and 7.3% for the first nine months, but Seating segment margin declined to 4.9% from 5.8% in Q3 and to 5.1% from 6.3% for the first nine months.
- EPMS sales increased 17.0% in Q3 and 20.4% for the first nine months. EPMS margin improved to 10.9% from 7.4% in Q3 and to 9.5% from 6.8% for the first nine months.
- New business and improved production volumes increased sales, while customer price reductions and vehicle-platform changeovers reduced profitability. Management cited favorable operating performance and restructuring benefits as partial offsets.
- Gross margin improved in Q3 but declined for the nine-month period. SG&A increased to $128.6 million in Q3 and $386.1 million for the first nine months, although nine-month SG&A remained 3.2% of sales.
- The effective tax rate increased to 32.3% in Q3 and 27.2% for the first nine months, compared with 19.0% and 20.3%, respectively, primarily because a substantial U.S. valuation allowance was reversed in the fourth quarter of 2012.
- The company issued $500 million of 4.75% senior notes due 2023, redeemed $70 million of principal from the 2018 and 2020 notes, and amended its revolving credit facility to increase capacity from $500 million to $1.0 billion and extend maturity to January 2018.
- Lear repurchased $1.0 billion of common stock during the first nine months, including an $800 million accelerated share repurchase. The ASR was expected to be completed by March 2014, with $750 million of additional authorization thereafter.
- Guilford Mills, acquired in 2012, contributed $141 million to the nine-month sales increase; the company also sold its 22.88% interest in an affiliate for net proceeds of $49.6 million.
Guidance, outlook, risks and unusual items
- Management estimated 2013 capital spending at approximately $450 million and expected total 2013 domestic and foreign pension contributions of $20 million to $25 million.
- The company recorded $42.9 million of restructuring charges and approximately $4 million of related manufacturing inefficiency charges in the first nine months. It expected approximately $15 million of additional restructuring costs related to actions initiated by September 28, 2013.
- Management believed cash, operating cash flow and available revolver capacity would fund ordinary-course obligations, dividends, restructuring, capital expenditures and debt service. Future liquidity remains dependent on operating cash flow, customer and supplier conditions, production levels and working-capital management.
- Key operating risks include vehicle production volatility, loss or insourcing of customer programs, customer price reductions, launch costs, supplier disruptions, labor issues, raw-material and commodity costs, foreign exchange, emerging-market execution and restructuring effectiveness.
- Legal and contingent matters included $14.5 million of reserves for legal disputes, $26.6 million of product liability and warranty reserves, and $5.1 million of environmental reserves. The automotive wire-harness antitrust litigation remained unresolved, and potential losses could not reasonably be estimated.
- Other unusual items included $37.8 million of nine-month other expense, a $3.6 million debt-extinguishment loss, $3 million of proxy-contest costs, $7.3 million of fire-related losses and incremental costs, and $26 million of net tax benefits.
- Foreign exchange derivatives had $886 million of notional exposure at September 28, 2013. Management estimated that a hypothetical 10% strengthening of the U.S. dollar could reduce annual earnings by approximately $26 million based on transactional exposures.
- The filing states that no material changes occurred in previously disclosed risk factors and that disclosure controls were effective as of quarter-end.
Important facts for investors to verify
- Whether Seating margin can recover from the effects of platform changeovers, customer price reductions and restructuring costs.
- Whether EPMS growth and margin expansion are sustainable as new programs mature.
- The final share count and settlement economics of the $800 million ASR, as well as the timing and use of the remaining $750 million authorization.
- Actual 2013 restructuring spending versus the expected additional $15 million and the related operating benefits.
- Cash conversion, particularly the impact of receivables, inventories, tooling recoveries and customer payment terms.
- Debt-service requirements, refinancing risk and continued compliance with restrictive covenants.
- The eventual outcome and potential financial exposure from the wire-harness antitrust litigation, product liability, warranty and environmental matters.
- The sustainability of reported tax benefits and the effect of future valuation-allowance changes on the effective tax rate.