Lear Corporation (LEA) Earnings & Analysis

Latest quarter

Lear’s third-quarter revenue missed the consensus, while adjusted earnings per share of $3.71 exceeded the $3.32 consensus estimate. Revenue rose to $5.8 billion from $5.7 billion a year earlier.

The company’s filing attributed the sales increase to new business and higher production on Lear platforms in Europe and Africa, partly offset by lower production in Asia and North America. Seating sales rose to $4.3 billion from $4.2 billion, while E-Systems sales were $1.4 billion in both periods. The filing said E-Systems earnings benefited from operating performance and higher production, partly offset by the winddown of some businesses.

Lear reported a gross margin of 6.6%, compared with 6.4% a year earlier, and diluted earnings of $2.74 per share, compared with $2.02. CFO Jason Cardew said operating cash flow declined because of higher tooling and engineering investment and the timing of working capital. Lear’s free cash flow was $158.4 million, compared with $307.0 million a year earlier.

Lear’s reported revenue was below its own quarterly guidance.

Adjusted EPS is the figure the consensus estimates, not the GAAP EPS above.

What management said on the call

Asked about Lear’s performance in China, CFO Jason Cardew said weaker domestic demand and the company’s limited exposure to exports had weighed on growth. He said much of Lear’s business with Chinese automakers is in non-consolidated joint ventures and that including those ventures would eliminate more than half of the quarter’s negative growth against the market in China. Cardew added that Lear is underrepresented in the lower end of the market, where Chinese exports are concentrated.

CEO Ray Scott said Lear had secured approximately $3.9 billion in net business awards year to date, including approximately $3.1 billion in Seating and $800 million in E-Systems. Cardew said Chinese automakers accounted for $900 million of the total. Scott said approximately 70% of year-to-date E-Systems awards were for new or conquest programs.

On margins, Cardew attributed the quarter’s adjusted Seating margin to operating performance and new business, partly offset by lower volumes on Lear platforms. For E-Systems, he cited operating performance and higher volumes, partly offset by programs ending production and discontinued product lines. Scott said rising commodity and other input costs remained a factor, but expected positive E-Systems net performance in the fourth quarter despite higher copper and launch costs.

Asked about scaling automation, Scott said Lear could apply elements of its Orion seating facility to other plants, although production downtime and capital adjustments could complicate installations. He said production at Orion begins next year and that automation is expected to reduce conversion-cost requirements by 10 to 15%.

On the quarter ahead, Cardew said commercial negotiations, execution and China demand would influence where results fall within the fourth-quarter range. Scott also said Cardew had elected to retire and Jared Fideli would succeed him as CFO effective March 1.

Guidance

Lear lowered its full-year revenue outlook to $23.35 billion to $23.75 billion; Cardew said the revision reflected a changed production outlook on Lear platforms in China. Lear now forecasts non-GAAP free cash flow of $565.0 million to $665.0 million; its previous outlook listed $640.0 million.

The company expects approximately $200 million in restructuring costs and said it had increased that outlook by $25 million.