Lear Corporation 2019 Q2 Form 10-Q Summary
Business context and reporting period
Lear designs and manufactures automotive seating, electrical distribution systems, electronic modules, electrification products, connectivity products and related software for global automotive original equipment manufacturers. The filing covers the thirteen-week quarter and six months ended June 29, 2019, compared with periods ended June 30, 2018. Results are unaudited and reported under U.S. GAAP.
Lear operates through Seating and E-Systems. Global light-vehicle production declined 7% in the first half of 2019, including declines of 3% in North America, 6% in Europe and Africa, 8% in Asia and 3% in South America.
Key financial metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $5,007.6 million | $5,580.8 million | $10,167.7 million | $11,314.5 million |
| Gross profit / margin | $478.2 million / 9.5% | $638.1 million / 11.4% | $951.4 million / 9.4% | $1,269.5 million / 11.2% |
| Income before taxes and affiliate income | $266.9 million | $443.6 million | $553.8 million | $891.4 million |
| Net income attributable to Lear | $182.8 million | $331.4 million | $411.7 million | $685.1 million |
| Diluted EPS | $2.92 | $4.83 | $6.66 | $9.99 |
| Operating cash flow | Not separately provided | Not separately provided | $455.9 million | $753.7 million |
| Capital expenditures | Not separately provided | Not separately provided | $259.3 million | $332.2 million |
Q2 sales decreased 10%, net income attributable to Lear decreased 45%, and diluted EPS decreased 40%. For the first six months, sales decreased 10%, net income attributable to Lear decreased 40%, and diluted EPS decreased 33%. Net income and EPS benefited from lower average diluted shares outstanding, which declined to 62.4 million from 66.7 million in Q2.
- Q2 Seating sales declined 10% to $3.84 billion and segment margin declined to 7.4% from 8.1%.
- Q2 E-Systems sales declined 11% to $1.17 billion and segment margin declined to 7.3% from 13.4%.
- Six-month Seating segment margin declined to 6.9% from 8.0%; E-Systems margin declined to 8.8% from 13.5%.
- Material cost was 64.8% of sales in the first half of 2019 versus 64.7% in the prior-year period.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $1.269 billion at June 29, 2019, compared with $1.493 billion at December 31, 2018. Cash, cash equivalents and restricted cash totaled $1.291 billion.
- Total debt, including current and long-term portions and before certain unamortized costs and discounts, was approximately $2.34 billion; long-term debt reported on the balance sheet was $2.30 billion.
- Lear had no borrowings under its $1.75 billion revolving credit facility and had $239.0 million outstanding under its term loan facility.
- Management reported approximately $1.3 billion of cash and $1.75 billion of available revolver capacity and believed liquidity was sufficient for ordinary-course obligations.
- Debt increased primarily because Lear issued $700 million of senior notes in May 2019, redeemed the $325 million 2024 notes, and financed the Xevo acquisition.
- Lear was in compliance with all debt covenants as of June 29, 2019.
Cash deployment and capital allocation
- Operating cash flow was $455.9 million, down $297.8 million year over year, primarily because of lower earnings and an unfavorable accounts-receivable change.
- Investing cash outflows were $580.1 million, including $320.9 million for the Xevo acquisition and $259.3 million of capital expenditures.
- Financing cash outflows were $105.3 million after note issuance, debt redemption, share repurchases and dividends.
- Lear repurchased 1.99 million shares for $279.5 million during the first half, with $1.304 billion remaining under the authorization.
- Quarterly dividends increased to $0.75 per share from $0.70 per share in the comparable period.
Material changes and unusual items
- On April 17, 2019, Lear acquired Xevo Inc. for $320.9 million net of cash acquired. The preliminary allocation included $197.5 million of goodwill and $122.2 million of intangible assets. Xevo contributed less than 1% of Q2 sales and represented approximately 3% of total assets at quarter-end.
- Lear recorded $91.0 million of restructuring charges in the first half, including $81.4 million of employee termination costs, $3.6 million of asset impairments and $2.0 million of contract termination costs. Related manufacturing inefficiency charges were approximately $3 million.
- Management expects approximately $65 million of additional restructuring costs related to actions initiated by June 29, 2019.
- The company recognized an $10.6 million loss on extinguishment of debt and $6.3 million of related financing costs.
- The first-half 2019 effective tax rate was 21.0%, compared with 19.7% in 2018. Significant 2019 tax items included an $18.4 million benefit from changes in the tax status of affiliates, a $26.6 million benefit related to restructuring and other items, and a $10.4 million expense from a foreign deferred-tax-asset valuation allowance.
- Lease accounting adoption on January 1, 2019 added $438.1 million of right-of-use assets and $445.8 million of lease obligations without a significant reported operating-results or cash-flow impact.
Outlook, management commentary and risks
- Management estimated 2019 capital expenditures at approximately $650 million and expected pension contributions of approximately $5 million to $10 million.
- The filing does not provide a clear formal full-year revenue or earnings guidance figure.
- Management expects to continue quarterly dividends and share repurchases, subject to financial condition, operating results, capital requirements, market conditions and alternative uses of capital.
- Primary operating risks include lower vehicle production, customer platform losses, customer price reductions, raw-material and commodity costs, supplier disruptions, tariffs and trade policy, foreign-exchange volatility, labor issues, product launches, warranty and recall claims, cybersecurity, legal and environmental matters, and tax valuation allowances.
- Legal reserves were $14.1 million, product liability and warranty reserves were $26.8 million, and environmental reserves were $8.9 million at quarter-end. Management stated that current matters were not expected to have a material adverse effect, while noting that outcomes remain uncertain.
- Foreign-currency derivative contracts had $2.715 billion of notional value and $28.8 million of net fair value at June 29, 2019. Approximately 82% of 2018 consolidated sales were generated outside the United States, although some were dollar-denominated.
Most important facts for investors to verify
- Whether restructuring actions and operational improvements can offset continued vehicle-volume declines, customer price reductions and weaker E-Systems profitability.
- The final purchase-price allocation, integration progress and revenue growth from Xevo.
- Free cash flow after approximately $650 million of planned capital expenditures, dividends, share repurchases and restructuring cash costs.
- Debt leverage, interest expense and covenant headroom following the 2019 note issuance and acquisition financing.
- The sustainability of the $0.75 quarterly dividend and planned share repurchases if automotive production remains weak.
- Potential changes in tax valuation allowances, foreign-exchange exposure, commodity costs, warranty or recall claims, and other contingencies.