Lear Corporation 2012 Q2 Form 10-Q Summary
Business context and reporting period
Lear Corporation is a global Tier 1 automotive supplier of complete seating systems, related components, electrical power management systems and related components. The company serves major automotive manufacturers through worldwide operations. This unaudited Form 10-Q covers the thirteen-week quarter and six months ended June 30, 2012, compared primarily with the periods ended July 2, 2011.
Global vehicle production increased approximately 9% in the first half of 2012 to 40.4 million units. North American production increased approximately 22%, while European production declined approximately 7%.
Key financial metrics
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $3,665.0 million | $3,676.3 million | $7,309.0 million | $7,188.0 million |
| Gross profit | $314.6 million | $346.6 million | $624.4 million | $670.0 million |
| Gross margin | 8.6% | 9.4% | 8.5% | 9.3% |
| Net income attributable to Lear | $145.4 million | $177.5 million | $279.5 million | $333.5 million |
| Diluted EPS | $1.45 | $1.65 | $2.76 | $3.09 |
| Operating cash flow | Not separately provided | Not separately provided | $159.8 million | $360.9 million |
Q2 pretax income before equity earnings was $165.8 million, with a 19.2% effective tax rate, compared with $201.5 million and 9.8% in the prior-year quarter. Six-month pretax income before equity earnings was $339.8 million, with a 20.9% effective tax rate, compared with $400.1 million and 14.9% in the prior-year period.
Q2 segment earnings were $190.0 million, or approximately 5.2% of sales, versus $220.2 million, or approximately 6.0%, in Q2 2011. Seating segment earnings were $183.6 million, with a 6.6% margin, versus $223.4 million and 7.8%. EPMS segment earnings were $58.6 million, with a 6.7% margin, versus $48.5 million and 5.9%.
Financial position, cash flow, debt and liquidity
- Cash and cash equivalents were $1.332 billion at June 30, 2012, down from $1.754 billion at December 31, 2011.
- Total assets were $7.504 billion, compared with $7.011 billion at year-end 2011. Equity was $2.701 billion, compared with $2.561 billion.
- Long-term debt was $695.6 million, consisting primarily of $350 million of 7.875% senior notes due 2018 and $350 million of 8.125% senior notes due 2020.
- No borrowings were outstanding under the $500 million revolving credit facility, which expires June 17, 2016. Lear reported compliance with its debt covenants.
- First-half operating cash flow of $159.8 million was reduced by working-capital uses, including $399.2 million from accounts receivable and $92.7 million from inventories, partly offset by $329.8 million from accounts payable.
- Investing cash outflows were $421.9 million, including $180.4 million of capital expenditures and $246.1 million for the Guilford acquisition.
- Financing cash outflows were $152.4 million, including $122.5 million of share repurchases and $27.6 million of dividends to Lear stockholders.
Material changes versus the prior comparable period
- Sales increased 1.7% in the first half, but Q2 sales declined slightly. New business and the Guilford acquisition were offset substantially by unfavorable foreign exchange, which reduced Q2 sales by approximately $197 million and first-half sales by approximately $265 million.
- Gross margin declined 80 basis points in both Q2 and the first half. Management attributed the reduction primarily to higher product and facility launch costs, program development costs, lower production volumes on key platforms and customer price reductions.
- Net income attributable to Lear declined 18% in Q2 and 16% in the first half. Interest expense, other expense and taxes were higher than in the prior-year periods.
- EPMS performance improved, with Q2 sales up 6.8% and margin increasing to 6.7%. Seating sales declined 2.3% and margin fell to 6.6%.
- Cash flow from operations declined by $201.1 million in the first half, reflecting lower earnings, working-capital requirements, product and facility launches and restructuring-related payments.
- Lear completed the $246.1 million acquisition of Guilford Mills on May 31, 2012. Guilford manufactures automotive and specialty fabrics and had approximately $400 million of annual sales. The purchase-price allocation was preliminary and included $101.4 million of goodwill and $53.0 million of intangible assets.
Guidance, outlook, commentary, risks and unusual items
- No formal revenue or earnings guidance is provided in the filing. Management estimated 2012 capital expenditures of approximately $460 million, including approximately $25 million related to replacement assets following a 2011 fire.
- Restructuring charges were $8.1 million in the first half, with approximately $4 million of additional costs expected for actions initiated through June 30, 2012. Cash expenditures for restructuring were approximately $57 million in the first half.
- Management expects pension contributions of $35 million to $45 million in 2012 and defined-contribution program contributions of approximately $14.5 million.
- On July 24, 2012, Lear elected to redeem 10% of the principal amount of each senior note series at 103% of principal plus accrued interest. The company expected to pay approximately $72 million and record an approximately $4 million loss on debt extinguishment in Q3 2012.
- Q2 and first-half results included approximately $15 million of income from Lear’s share of an affiliate’s reversal of a deferred-tax valuation allowance. The prior-year periods included a $20 million tax benefit from reversal of a foreign subsidiary valuation allowance.
- Legal reserves were $13.7 million, product liability and warranty reserves were $21.2 million, and environmental reserves were $3.7 million at June 30, 2012. Automotive wire-harness antitrust litigation remained unresolved; the company stated that potential loss could not reasonably be estimated.
- Key risks include vehicle production declines, customer concentration and platform losses, customer-imposed price reductions, product-launch execution, supplier distress or disruption, raw-material and commodity costs, foreign exchange, pension performance, recalls and warranty claims, legal proceedings, environmental liabilities and limitations on tax-attribute utilization.
- The company reported no material impairment indicators for long-lived assets or goodwill as of June 30, 2012, but noted continued exposure to industry events and automotive production estimates.
Important facts for investors to verify
- Whether the Guilford acquisition achieves expected strategic, revenue and cost benefits and whether the preliminary purchase-price allocation changes.
- The impact of launch costs, customer price reductions, production volumes and foreign exchange on seating margins and consolidated profitability.
- The sustainability of operating cash flow given working-capital demands, approximately $460 million of planned capital spending and restructuring payments.
- The effect of the August 2012 debt redemption, including cash usage and the expected Q3 extinguishment loss.
- The status and potential exposure from wire-harness antitrust litigation and other product liability, warranty and environmental matters.
- Whether Lear reverses any portion of its substantial U.S. and foreign deferred-tax valuation allowances and how that would affect future tax expense and earnings.
- Compliance with senior-note and revolving-credit covenants and the continued availability of the $500 million revolving facility.